P2 - Active equity investing: strategies Flashcards
(25 cards)
Describe the diference between Fundamental and Quantitative approach in the context of active magmt investment
- Fundamental: Subjective in nature, relying on analyst judgment. Use financial statements, use skill and experience to estimate intrinsic value of securities
- Quantitative: objective in nature, use quantitative model that generate systematic rules to select investment. (e.g. P/E ratio, market cap, debt to equity ratio)
Describe the difference betwen bottom up and top down approach
Bottom up uses infos of INDIVIDUAL COMPANIES (e.g profitability, price or momentum)
Top down uses infos that affect many companies like macro enviroment andd government
Explain contrarian investing in context of bottom up strategies
Purshasing or selling against prevailing market sentiment.
Explain high quality investing in context of bottom up strategies
Intrinsic value and evidence of financial strength
Explain deep value investing in context of bottom up strategies
Low P/B ratio usually due to financial crisis.
Explain restructuring and ddistressed investing in context of bottom up strategies
Investing prior to or during an expected bankruptcy filing.
Decribe the concept of factor and drescribe e.g.
It’s variable or characteristc with asset returns are correlated (e.g size factor - smaller offer better returns , value factor - book value relative to market value also tended to outperform
Describe the process for built a factor performance portifolio (4 steps)
1) Rank investable stocks by factor
2) Divide into quantile (e.g 10% quantile represent 10% smallest companies)
3) Long/short portifolio long best quantile and short worst quantile
4) The performance of this long/ short tracked over time and it’s atributed for performance of factor
Explain the main drawback of built a factor performance portifolio
1) Middle quantile is lost
2) Assumed the return is linear to exposition to the factor, not always true
3) Concentration on correllated risk factors
4) Not “pure” correlation with risk factor it will tipically have exposure to other risk factors
Describe what’s is the main goal of factor performance portofolio
Identify and implement strategies related to factor that are predictors of the future
Explain the equity style rotation in context of a factor perfomance portifolio
Usually PM believes that certain factor outperform other in different times. (e.g. I believe small companies underperform when I have bigger surprise on interest rates)
Explain the activist strategies and their rationale in process and the caracteriscs of companies choosen to this investment
Especialize to take stake in listed companies and push from changes for increase Activist stake. Companies w/ lower earnings and revenue growth that other pairs and weak corporate governance.
Explain the impacts of activist strategies on campanies
The studies shows that activism strategies improve growth, profitability and corp gov but lead to more higher debt levels
Explain the pair trading strategie in context of active equity strategies
Identify two securities in the same industry tha historically highly correlated and profit on the breakdown in this relationship. Usually by long one position and short another.
Explain the market micro structure-based strategie in context of active equity strategies
Arbitrage strategies take adv of mispricing opportunities occuring due to imbalances of supply and demand that are expected only last a few miliseconds
Explain the risk arbitrage strategie in context of active equity strategies
Try to exploit inefficieces that may occur around corporate events such mergers and aquisitions, spin off, share buyback and special dividends.
Buy target company when the deal has been anounced. Take the risk that the deal not occur for regulatory or other constrains.
Explain a value trap in the context of pitfalls in fundamental investing
Buy a company w/ low P/E ratio but fail to recognize the trigger that deteriorate fundamental business conditions. At first look, stock look cheap but the valuation are antecipating futher deterioration
Explain a growth trap in the context of pitfalls in fundamental investing
When a favorable future growth prospects already reflect in the price.
Explain the steps for implement the quantitative active investment strategy (5)
1) Define the market opportunity
2) Acquire and process data
3) Back test the strategie
4) Evaluate the strategy
5) Construct the portifolio
Explain the pitfalls (6) in quantitative investing
(1) Suvivorship bias - Back test are made on those companies that survive
(2) Look ahead bias - Trading signals w/ data when the information was not available
(3) Data mining
(4) Turnover
(5) Lack of availability to borrow - market constrains to implement the strategie
(6) Transaction costs
Explain when a manager get the conclusion that factor has a preditive power using pearson correlation
When across section of securities the factor scores is positively correlated w/ subsequent returns.
Explain holding based in the context of style classification
Can assing caracteristcs to determine of size and style.
Explain return based in the context of style classification
Regression of fund return vs. four passive indices. Higher the coeficient for each category defines style. Depends on each coeficient results can tell if PM has NO EXPOSURE equal 0, SMALL EXPOSURE 0.15, HIGH EXPOSURE 1
Explain the process of compare return style vs. holding style method with self described by the manager.
The main goal is to compare the style looking for the method with spoken style tell by PM.
