S11+12 Flashcards Preview

CFA > S11+12 > Flashcards

Flashcards in S11+12 Deck (49):
1

tracking ratio =

active return / tracking risk

2

return based analysis

regressing returns on a managers portfolio AGAINST the returns of various security indices

3

holdings based analysis

evaluating characteristics of securities from the portfolio

value =
- low PE,
- low PB,
- high div,
- small EPS growth,
- high earnings volatility (cyclicals),
- utility and financials (not tech and health)

4

return based analysis - advantages

characterizes entire portfoli
enables comparison of entire portfolios
summarizes the result of the investment process
methodology backed by theory
low information requirements
different models resutls in same conclusions
low cost
fast speed

5

return based analysis - disadvantages

may be innacuratge due to style drift
misspecified indices can lead to misleading conclusions

6

holdings based analysis - advantages

characterizes each security
enables comparison of securities
quick in detection of style drift

7

holdings based analysis - disadvantages

is not consistent with methods used by managers to select securities
requires subjective judgement to clasify securities
requires more data

8

style drift

when PM stRAYs from his original/STATED style objective

9

pricing inefficiencies on the short side

barriers exist to short sales
firm management is more likely to promote stock via accounting manipulation
analysis on the sellside are more likely to issue buy recommendation
analysts face pressure from management against issuing sell recommendations

10

instruments for equitizing market neutral strategies

futures
ETFs

11

short extension strategies

120/20

12

advantages of short extension strategies

perceived as an equity strategy
can exploit short ideas
can be implemented without derivatives

13

disadvantages of short extension strategy

higher transaction costs
return is generated just via finding long/short ideas (no futures, interest as present in equitized market-neutral long-short portfolio)

14

selling discipline - 6 types

price target SD
deteriorating fundamentals SD
opportunity cost SD
valuation level SD
down from cost SD
up from cost SD

15

fundamental law of active management =

InfoR = InfoC * Sq Root (Investor Breadth)

16

true active return =

total return - normal return

17

misfit active return =

normal - benchmark

18

total active risk =

SqRoot (True active risk ^2 + Misfit active risk^2)

19

true information ratio

True active return / true active risk

20

equities are a good

inflation hedge especially when firm can pass inflation on the consumer

21

passive equity strategy recommended to investors which are

taxable
have informational disadvantage
in informationally efficient large cap market
avoiding high transaction costs of small cap market

22

tax efficiency ETF vs Mutual funds

ETFs are more efficient

23

cost of holding ETF vs mutual funds

ETF are less expesnve

24

ETF better than futures due to

infinite life
easier to manage

25

forms of passive investment

full replication
stratified sampling
optimisation using a factor model

26

socially responsible investing

ethical investing

biased to GROWTH and small caps

27

why one would weight stocks in an index based on PEs

to prevent overweighting the overvalued stocks in that index

28

optimisation less convenient vs stratified sampling due to

more frequent rebalancing

29

investors more risk averse when facing total OR active risk?

active

30

price weighted indexes

Dow Jones Ind / Nikkei

31

float weighted indexes

CAC DAX FTSE RUSSEL S&P MSCI

32

3 goals of corporate governance

(and for resolving principal-agent problem)

affecting behaiviour of agents
reducing asymmetry of information
removing agents who misbehave or violate ethics

33

examples of unethical behaviour

self dealing - converting corporate funds to personal use
info manipulation - to hide health of firm
anti-competitive behavior
opportunistic exploitation of suppliers
substandard working conditions
environmental degradation
corruption - using bribery to gain illegal advantage

34

origins of unethical behavior

flawed personal ethics
failure to realize
profit/growth culture
flawed business culture with unrealistic goals
unethical leadership

35

purpose of stakeholder impact analysis

force the company to make choices among stakeholders and identify which groups are most critical to the company

36

principal-agent problem

agents of the company (mgmt) not acting in a way that achieved the goals of the principals of the company (shareholders)

37

friedman dorctrine

increasing profits within the rules of the game
flaw: too vague and broad

38

utilitarianism

businesses must weight consequences to the society and seek to produce highest good for the largest number of people
flaw: many costs and benefits are difficult to measure, can lead to exploitation of a small group of people

39

kantian ethics

people are different from other production factors, so they deserve dignity and respect
flaw: not sufficient to be a complete philosophy

40

rights theories

all individuals have rights and privileges
flaw: greatest good of utilitarianism cannot come at the expense of violation of the rights of others

41

justice theory

focus just on distribution of economic input
justice met if all participants agree on fair rules

42

4 tradeoffs for tracking international indices

- breadth vs cost (liquidity)
- liquidity vs cost of altering portfolio tracking a popular index at each reconstitution
- making precise float adjustment vs cost of reconstituting a portfolio
- investing in popular index vs cost of lack of objectivity in construction of the index

43

proprietary index models are ___ to reconsitute

more expensive

44

causes of contagion

currency may be devalued to keep exports competitive in line with other country which devalued

drop in exports to a contracting country

initial devaluation serving as a wake up call for investors

crisis in one country can lead to credit crunch in another

initial crisis cause investors to liquidate their investors in other countries.

45

negative attributes of corporate governance in emerging countries

- mgmt has larger voting power
- infrequent takeovers do not discipline mgmt
- firm shares can be owned by another which is concentrating control
- gov capital controls to benefit favored firms
- strong creditor rights = greater frequency of bankrupcy filings
- weaker governance firms may suffer more inmarket crises
- lower CEO turnover can leave poor management in place

46

what is driving the pricing of newly liberalized market vs unliberalized

smaller covariance risk instead of higher variance risk

47

style of a quan OR qual itative factor in researching investors

quantitative

48

why performance based compensation is bad for staff

volatility in compensations creates problem in retaining staff

49

investors total return in equitizing long short portfolio =

=
+ pl from LongShort position
+ PL from Futures
+ Interest earned on cash from short sale