Please enable JavaScript.
Coggle requires JavaScript to display documents.
CHAPTER 8 PORTFOLIO MANAGEMENT 8.1 PASSIVE AND ACTIVE STRATEGY -…
CHAPTER 8
PORTFOLIO MANAGEMENT
8.1 PASSIVE AND ACTIVE STRATEGY
PORTFOLIO MANAGEMENT STRATEGIES
ACTIVE PORTFOLIO
:red_flag: Refers to a portfolio management strategy that involves making precise investments for outperforming an investment benchmark index
:red_flag: The portfolio manager that follows the active management strategy that exploits the market inefficiencies by buying under-valued securities or by short selling over-valued securities.
:red_flag: Any of these procedures can be used alone or in combination
STYLE OF STOCK SELECTION
TOP DOWN APPROACH
:star: Managers observes the market as a whole and decide about the industries and sectors that are expected to perform well in the ongoing economic cycle
BOTTOM UP APPROACH
:star: The market conditions and expected trends are ignored and the evaluation of the company are based on the strength of their product line, financial statements, or any other criteria
PASSIVE PORTFOLIO
:red_flag: Refers to the financial investment strategy where an investor makes investment as per the fixed strategy that does not involve any forecasting
:red_flag: It stresses on minimizing the investment fees and avoiding the unpleasant result of failing to correctly predict the future
STYLE OF STOCK SELECTION
INDEXING THEORY
:star: The index funds are used for taking the advantages of efficient market theory and for creating a portfolio that impersonate a specific index. The index funds can offer benefits over the actively managed funds because they have lower than average expense ratios and transaction costs
EFFICIENT MARKET THEORY
:star: Relies on the fact that the information that affects the market is immediately available and processed by all investors. Thus, such information is always considered in the evaluation of the market prices
DEFINITION
:green_cross:Refer to the approaches that are applied for the efficient portfolio management in order to generate the highest possible returns at lowest possible risks.
WHAT IS
:check:The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance
RISK AVERSION
:!: Given a choice between two assets with equal rates of return, most investor will select the asset with lower risks
OBJECTIVES
:black_flag: Should be based on investor`s ability to take risk and willingness to take risk
:black_flag: Risk tolerance depends on an investor’s current net worth and income expectations and age
More net worth allows more risk taking
Younger people can take more risk
:black_flag: A careful analysis of the client’s risk tolerance should precede any discussion of return objectives.
BOND MANAGEMENT STRATEGIES
ACTIVE BOND STRATEGIES
:red_cross: Usually involve bond swaps, liquidating one group of bonds to purchase another group, to take advantage of expected changes in the bond market, either to seek higher returns or to maintain the value of a portfolio
:red_cross: INTEREST RATE ANTICIPATION STRATEGIES
one that involves selecting bonds that will increase the most in value from an expected drop in interest rates
involves moving between long-term government bonds and very short-term treasury bills, based on a forecast of interest rates over a certain time horizon, to provide the maximum increase in price for a portfolio
:red_cross: CREDIT STRATEGIES
bond of higher quality generally have higher price than those of lower quality of the same maturity.
based on credit worthiness of the bond issuer, since the chance of default increases as the creditworthiness of the issuers decline
lower quality bonds pay a higher yield
types of credit investment strategies are 'quality swaps' and 'credit analysis strategies'
:red_cross: FUNDAMENTAL CREDIT ANALYSIS
comparing the company`s financial ratios with other firms in the industry, especially the interest coverage ratio, which is earnings before interest and taxes
:red_cross: ECONOMIC ANALYSIS
debt burden, financial status, fiscal problems, the state of the general and local economy
PASSIVE BOND STRATEGY
:red_cross:BOND INDEXING
mainly used to achieved greater returns with lower expenses rather than matching cash flows with liabilities or duration of bonds with liabilities
:red_cross: Usually involve setting up a bond portfolio with specific characteristics that can achieve investment goals without altering the strategy before maturity.
:red_cross: CASH FLOW MATCHING
it involves using dedicated portfolio with cash flows that match specific liabilities
:red_cross: BOND IMMUNIZATION STRATEGIES
depend on the fact that interest rate risk and the reinvestment risk are reciprocal when one increases, the other declines
:no_entry: Management of a bond portfolio either to increase returns based on anticipated changes in these bond-pricing factors to maintain a certain return regardless of changes in those factors.
EQUITY MANAGEMENT STRATEGIES
ACTIVE EQUITY STRATEGY
:warning: FUNDAMENTAL STRATEGIES
active fundamental managers use three generic themes
asset class rotation strategy are shifting fund in and out the stock market depending managers perception how stock is valued compared to the various asset class alternative
:warning: TECHNICAL ANALYSIS
contrarian investment strategy
based other belief that the best time to a stock is where the majority other investors are the most bearish and bullish
price momentum strategy
earnings momentum strategy
DISADVANTAGES
past price pattern may not be repeated in the future
the intense competition of those using the trading rules will render the technique useless
the values that signal action constantly changing
:warning: ANOMALIES AND ATTRIBUTES
the weekend effect
the January effect
firm size
:warning: TAX EFFICIENCY AND ACTIVE EQUITY MANAGEMENT
passive equity portfolio
active equity portfolio
pension fund and university endowment funds
tax cost ratio
PASSIVE EQUITY STRATEGY
:warning: FULL REPLICATION
All securities in the index are purchased in proportion to weights in the index.
helps ensure close tracking
increase transaction costs, particularly with dividend reinvestment
:warning: SAMPLING
-Buys a representative sample of stocks in the benchmark index according to their weights in the index.
fewer stocks means lower commissions
reinvestment of dividends is less difficult
will not track the index as closely, so there will be some tracking error
:warning: Replicate the performance of an index. It also may slightly under perform the target index due to fees and commissions. The costs of active management (1 to 2 percents ) are hard to overcome in risk-adjusted performance
:warning: QUADRATIC OPTIMIZATION
historical information on price changes and correlations between securities and input into a computer program that determines the composition of a portfolio that will minimize the tracking error with the benchmark
this relies on historical correlations, which may change over time, leading to failure to track the index
:<3: Equities have historically serves as a good inflation hedge when the inflation can be priced into the stock, and can be passed through the consumer. It also provides a growth dimension to the portfolio