CFA 2017 level 3 flash card flash card equity portfolio management

CFA Level - Book - Equity Portfolio Management Study online at quizlet.com/_or5gu Allocating to Managers (3 Steps) Allocate % to Equities Divide Active/Semi/Passive: Active Risk/Return UtilActive = ExpActRetun - (Risk Aversion x Variance of Active Return) Use the Eff Frontier, but w/ Active Return/Active Risk plotted Investors are more risk adverse w/ Active Risk then Total Risk Have to believe active risk is possible, and they can find it Performance is judged w/ a passive benchmark Biases of Weighting Schemes - Equal Weight Bias toward small firms More small firms then large more rebalancing = more expenses Biases of Weighting Schemes - Price Weight Higher priced stocks have greater impact stock prices are arbitrary w/ splits/repurchases/etc Stock prices change constantly Assumes share purchase - rarely followed in real life Biases of Weighting Schemes - Value Weight Big Companies dominate the impact mature firms bias may be less diversified if over represented by large firms Some investors may not be able to mimic value weighted if they are subject to Max % holdings Buffering A stock is not immediately reclassified w/ a slight characteristic change Creates less turnover Buy Side Analyst works for and builds a portfolio for investment firm usual analysts presents their data to a committee The Completeness Fund Approach Paper Card Core -Satellite Core is passive satellite is active Enhanced Indexing Derivative Based Holds Cash + Long Futures Uses the cash to place bets on yield curve All alpha comes from bond selection Limitations - Good managers will be copied Models obtained from historical data may not work in the future 10 Enhanced Indexing Stock Based Manager Over/Underweights stocks Risk is controlled by monitoring factor risk/industry exposure Portfolio looks like an index except for managers picks 11 Equitizing a long/short portfolio If you want to add systematic risk to a MKT neutral strategy go long equities futures w/ notional principal = cash from shorts Net profit = L/S Profit + Futures P/L + Int earning on short sale Or ETFs can be shorted 12 Equity Futures - Cons: Futures have a finite life Using basket trades and futures may be problematic due to the uptick rules - can't short on a downtick ETFs are exempt from uptick rules 13 Equity Style Indices Either by Quantity (80% gr/20% value) or Category (one or the other)Most indices are constructed w/ no style overlap 14 Equity Total Return Swap Typically Swap MKT for Fixed Creates Synthetic diversification, low cost! Could be great for avoiding withholding tax on int'l investments 15 Famous Indexes by Schemes Price - Dow Jones & Nikkei Value (most are float adjusted) - S&P, Russell, MSCII, TOPIX CAC40, DAX30 Equal Weight - Value line composite average 16 Index Funds vs Index ETFs (5) Index Mutual Funds are less frequently traded (1 time/day) ETFs not have to maintain record keeping for Shareholders - less cost Index MFS pay lower license fees to S&P vs ETFs ETF is generally more tax eff ETF can redeem by giving a basket of stocks to avoid taxable event Funds have to sell shares ETFs tend to cost less 17 Indexing a portfolio Full replication All stocks are bought per their weights Typically only used w/ large $ Pros: Low Tracking Risk, Low Turnover Cons: will underperform when assets are illiquid Return - Index Return - Admin - Cash Drag transactions 18 Indexing a portfolio Optimization Uses a factor model to match for factor type exposures of a fund to its index Pros: Factors take into account covariance between risk factors Lower tracking error then stratified Can combine Optm and Replication buy big positions and replicate small ones Cons: Risk sensitivities change over time Sample data can be skewed by security or time period Frequent rebalancing as sensitivities change 19 Indexing a portfolio Stratified Sampling Separating stocks in the index by size, p/e, industry into cells Each cell is then weighted w/in the cells manager picks representative stocks can be used for large indices, or when restricted due to concentrated positions Index Weighting Schemes Equal Weight Equal $ in each stock Periodic Rebalancing needed Index Weighting Schemes Free Float Adjustment Free Float - # of a firms shares available for purchase Some mkt cap weights can overstate free float Pros: Adjusts for shares actually available to the public More representative and follow w/ minimum tracking risk 20 21 Index Weighting Schemes Mkt Cap Weight Sum of total MKT Cap value of all stocks -Assumes you can hold each company relative to it's weight in the index Pros: Better represents the agg change in wealth vs price weight Automatically adjusts for stock splits Index Weighting Schemes Price Weight Assumes investor owns share or each stock -Add all the prices together and divide by # of stocks in the index -Divisor is adjusted for splits and add/drops -Pros: Easy to Calc Longer history of data 24 Information Ratio Ex Active Return / Tracking Risk - Oddly the highest in semi-active 25 Long Short Investing Can avoid systematic risk w/ Pairs trades Long one stock and short another in same industry This is called MKT Neutral and should have a benchmark of the risk free rate 22 23 26 Selecting Equity Managers Manager's Questionnaire Staff Quality, Quantitiy & Vision Inv Philosophy and Procedures - How you plan to find alpha? Risk manage? Stock Selection Techniques? Resources - Turnover, models, trading functions Performance - BM, Exp Alpha, Exp Risk, Holdings Fees 27 Sell Side Inv Banking Use research to promote stocks Also done by indv firms that paid for research 28 Separate or Pooled Accounts Index institutional Portfolios may use Pooled accounts, its advantageous for smaller funds Pros: Share a manager = lower fees vs funds You can also send your securities to offset costs 29 Short Extension Strategies (Partial Long/Short) Ex 120 Long / 20 short Long Undervalued/neutral value and short overvalued This tends to have mkt risk exposure Pros: perceived as an equity strategy Let's manager exploit overvalued stocks frees up funds for investing Doesn't need derivatives more efficient & Coordinated (No overlap) Cons: Transactions Costs (UP) Return is all alpha Benchmarked to equities 30 Social Responsible Investing Biases Tend to Tilt toward growth companies and small cap Used returns based analysis to monitor 31 Style Analysis Holdings Based Provides faster analysis then Returns based, cause holdings are updated often Requires more data ,subjective judgment in classifying securities (Morningstar) 32 Style Analysis Returns Based Returns of the fund are regressed vs various indices the regression coefficients (b scores) should some to use the b-scores to determine exposure and then construct a custom benchmark - Indices used should be mutually exclusive and exhaustive of asset classes -Benefits - Tests if reported style and actual style match Mult regressions can be used to see style shifts over time (Wave Chart) 33 Style Fit Is the R Square from the Returns based regression Lets you know - amount of the inv return explained by style indices - called style fit 1-sytle fit = Security Selection (Active bets away from that style) 34 When to use Active/Passive/Semi -If IPS states investor is taxable - Use Passive -If investor believes the markets are efficient - Use Passive On average Active-Expenses underperforms passive Active underperforms by expenses -In taxable accounts it's prudent to use Passive in LC, INTL, Even Small Cap in Taxable  ... industry This is called MKT Neutral and should have a benchmark of the risk free rate 22 23 26 Selecting Equity Managers Manager's Questionnaire Staff Quality, Quantitiy & Vision Inv Philosophy... all alpha Benchmarked to equities 30 Social Responsible Investing Biases Tend to Tilt toward growth companies and small cap Used returns based analysis to monitor 31 Style Analysis Holdings Based... and actual style match Mult regressions can be used to see style shifts over time (Wave Chart) 33 Style Fit Is the R Square from the Returns based regression Lets you know - amount of the inv