TEST 2 Revision Flashcards
Topics 4, 6, 7 4: The Modern Portfolio Theory+Capital Market Assumptions - Part1 6: Optimization + Risk Parity Portfolios 7: The Investment Management Process + Portfolio Construction (17 cards)
What is the nature of a cyclical sector structure? How does it behave in a market down fall?
Nature: Tied closely to the economic cycle; includes industries like consumer discretionary, real estate, and industrials.
Downturn Behaviour: Typically underperforms in a downturn as consumer and business spending decline.
Impact: High volatility and fluctuating returns; strong in economic booms, weak in recessions.
What is the nature of a sensitive sector structure? How does it behave in a market down fall?
Nature: Moderately affected by economic changes; includes sectors like technology, energy, and financials.
Downturn Behaviour: Shows some decline, but less extreme than cyclicals.
Impact: Medium volatility; returns can vary based on specific market conditions and sector trends.
What is the nature of a defensive sector structure? How does it behave in a market down fall?
Nature: Provides essential goods/services regardless of economic conditions; includes utilities, healthcare, and consumer staples.
Downturn Behaviour: Outperforms relative to other sectors, maintaining more stable performance.
Impact: Lower volatility; more stable and consistent returns, especially during recessions.
Communication Services, Energy, Industrials and Technology are examples of what sector structure and why?
Sensitive - These sectors are moderately affected by economic cycles. Their performance often depends on interest rates, innovation, and business activity. They’re not as volatile as cyclicals but still react to economic shifts.
Basic Materials, Financial Services and Real Estate are examples of what sector structure and why?
Cyclical - These sectors are highly tied to the economic cycle. Demand for materials, lending, and property rises in booms and falls in recessions, making them more volatile.
Healthcare and Utilities are examples of what sector structure and why?
Defensive - These provide essential services that remain in demand regardless of the economy. Their stability makes them less sensitive to downturns and a buffer during market stress.
Describe the difference between small cap, big cap and mid cap, and when each of them might be used/benefit in what scenario.
Mid-cap funds have moderate volatility and moderate liquidity. Small-caps stocks are more volatile and have less liquidity. Large-cap offers a steady and consistent return, and they have less volatility. Investors should consider investing in both for a balanced portfolio.
Know how to calc. returns?
(Prac test xx, qxx) - SHOW
tell me interpretation
PracT1 Q3
Know how to calc. beta?
(Prac test xx, qxx) - SHOW
tell me interpretation
If an asset has higher beta, it has a higher contribution of risk. Lower beta has a lower contribution of risk to the over portfolio’s volatility.
PracT1 Q3
Know how to calc. MCR?
(Prac test xx, qxx) - SHOW
tell me interpretation
..
PracT1 Q3
Know how to calc. risk/volatility?
(Prac test xx, qxx) - SHOW
tell me interpretation
..
PracT1 Q3
Why do financials do well when the economy is in an upturn?
Banks make money when they borrow at a cheaper rate and when they land at a higher rate they need to make a net income margin and this only happens when the yield curve is upward sloping and shield. Curves are only upward sloping when economies are growing.
Healthcare is a defensive sector meaning that it performs more consistently and is less impacted by economic cycles. Order disruption so upturn or downturn.
Economy upturn/downturn, define and tell me the indicators.
UPTurn: increasing economic output, employment, and consumer spending, can see if increasing GDP growth, rising employment rates, and a general increase in consumer confidence.
DOWNTurn: or recession, is a period when economic activity is contracting, usually defined as two or more consecutive quarters of negative GDP growth. Declining GDP, rising unemployment, decreased consumer spending, and potential for price deflation.
What are the risk usually of EM, EAFE, Small cap, large cap and US?
Emerging Markets (EM):
High political, economic, and currency risk; volatile but high growth potential.
EAFE (Europe, Australasia, Far East):
Moderate geopolitical and currency risk; affected by global trade and economic cycles.
Small Cap:
High volatility, less liquidity, more sensitive to economic shifts; high growth potential.
Large Cap:
Lower risk, more stable earnings; less growth but more resilience in downturns.
US Market:
Relatively lower risk; strong regulatory framework, but sensitive to Fed policy and global trends.
Allocations & optimisation constraints
2 and then summary of topics 4,6,7
Which of large caps and small caps during market or down become a growth investment?
Large cap-market- market downturns
Small cap - market upturn
Can you generate return in a market downturn and how?
Having a diversified portfolio, focussing on low risk assets can help navigate these periods.
