Weighting Schemes - Equal Weight Bias toward small firms More small firms then large more rebalancing = more expenses Weighting Schemes - Price Weight Higher priced stocks have greater i
Trang 11. Allocating to
Managers (3
Steps)
1 Allocate % to Equities
2 Divide Active/Semi/Passive: Active Risk/Return
UtilActive = ExpActRetun - (Risk Aversion x Variance of Active Return)
3 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
Weighting
Schemes - Equal
Weight
Bias toward small firms More small firms then large more rebalancing = more expenses
Weighting
Schemes - Price
Weight
Higher priced stocks have greater impact stock prices are arbitrary w/
splits/repurchases/etc
Stock prices change constantly Assumes 1 share purchase - rarely followed in real life
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
a slight characteristic change Creates less turnover
for investment firm usual analysts presents their data to a committee
7. The
Completeness
Fund Approach
Paper Card
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
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
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
Funds vs
Index ETFs (5)
1 Index Mutual Funds are less frequently traded (1 time/day)
2 ETFs do not have to maintain record keeping for Shareholders - less cost
3 Index MFS pay lower license fees to S&P vs ETFs
4 ETF is generally more tax eff ETF can redeem
by giving a basket of stocks to avoid taxable event Funds have to sell shares
5 ETFs tend to cost less
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
CFA Level 3 - Book 3 - Equity Portfolio Management
Trang 218. 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
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
Weighting
Schemes
-Equal
Weight
Equal $ in each stock
Periodic Rebalancing needed
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
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
Weighting
Schemes
-Price Weight
Assumes investor owns 1 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
Ratio
Ex Active Return / Tracking Risk - Oddly the highest in semi-active
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
Equity Managers
Manager's Questionnaire
1 Staff Quality, Quantitiy & Vision
2 Inv Philosophy and Procedures - How do you plan to find alpha? Risk manage? Stock Selection Techniques?
3 Resources - Turnover, models, trading functions
4 Performance - BM, Exp Alpha, Exp Risk, Holdings
5 Fees
Also done by indv firms that paid for research
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
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 1 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)
Trang 333.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)
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