TOPIC 7: Portfolio Construction & Implementation Flashcards
(30 cards)
Why do high yield (HY) bonds perform differently from investment grade (IG) bonds in growing vs declining markets?
HY: Behaves more like equity; performs well in growing economies and weakens in downturns.
IG: Performs well in downturns (lower risk, lower yield) and weakens when interest rates rise in growing markets.
Why do HY bonds have lower duration than IG?
Higher coupons and greater credit risk shorten their price sensitivity to interest rate movements.
Why might value outperform growth in a growing market, and growth outperform in a downturn?
Expanding market: Market focuses on recovery — undervalued firms outperform.
Contracting market: Market seeks companies with strong future earnings — growth stocks outperform.
Small vs large caps — when to buy?
Small caps typically outperform at the bottom of a cycle; large caps outperform at the top.
Large caps are more stable and globally diversified; small caps are more domestically focused.
What is strategic asset allocation (SAA)?
Establishing baseline proportions for each asset class in a portfolio (equities, fixed income, cash).
What is tactical asset allocation (TAA)?
Short-term adjustments to SAA to take advantage of current market conditions.
Why do portfolios blend core and satellite strategies?
Core provides stability and beta exposure.
Satellite adds opportunities to outperform and generate additional return (alpha).
Why is rebalancing important?
To bring portfolio back to its original allocation, control risk, and sell high, buy low.
What factors affect equity strategies?
Company’s fundamentals, industry conditions, market trends, and anomalies.
What are value investing signals?
Low P/E, financial trouble, neglected sectors — buying when the market underprices future recovery.
What are growth investing signals?
Rising earnings, innovations, strong future potential — buying companies poised for expansion.
Why do sectors perform differently across business cycles?
Certain sectors (like financials, discretionary, and materials) outperform during expansion;
Defensive sectors (like health care, consumer staples) outperform during downturns.
What is technical analysis?
Analyzing price charts and patterns to predict future movements; assumes past trends may repeat.
What’s the core-satellite approach?
Combine a stable, passive “core” portfolio with a small “satellite” of active strategies for additional return.
Why is transaction cost and risk consideration important when rebalancing?
To avoid eroding portfolio returns through frequent trades and ignoring volatility.
What is adaptive asset allocation?
An approach (like Sharpe’s) that adjusts portfolio weights based on current valuations and expected future returns.
Why do large firms typically outperform during late cycle?
Large firms are more stable, globally diversified, less vulnerable to downturns, and can leverage international opportunities and low-tax regimes.
What role does cash management play in portfolio implementation?
It provides liquidity for transactions, funding distributions, and meeting obligations without needing to sell assets at unfavorable prices.
Why might satellite holdings be less liquid?
Satellite positions often include alternatives, small caps, or specialized strategies, which may be thinner markets or harder to sell quickly.
Why is transaction cost consideration key during rebalancing?
To avoid frequent trades eroding portfolio returns and adding to portfolio risk — it’s a balance between staying close to your allocation and not overtrading.
What is strategic asset allocation (SAA)?
The baseline portfolio mix (equities, bonds, cash, etc.).
Aligns with your investment goals, risk tolerance, and time horizon.
What is tactical asset allocation (TAA)?
Short-term adjustments to SAA to exploit current market conditions or pricing anomalies.
Why is core and satellite a popular portfolio structure?
It lets you track a stable core portfolio (beta, low-cost) while adding a small satellite to pursue higher-risk, higher-reward opportunities.
What does drift mean in portfolio context?
Drift occurs when asset weights move away from their targets due to market movements — e.g., stocks outperform, causing their weight to grow.
