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BU473 (6)
Chapter 15

BU473 Chapter Notes - Chapter 15: Standard Deviation, Tracking Error


Department
Business
Course Code
BU473
Professor
Steve Balaban
Chapter
15

Page:
of 2
Chapter(15:(Equity(Portfolio(Management(Strategies(
An#Overview##
Passive#Equity#Portfolio#Management#Strategies##
Long-term#buy-and-hold#strategy##
Usually#tracks#an#index#over#time##
Designed#to#match#index#return##
Active#Equity#Portfolio#Management#Strategies##
Attempts#to#outperform#a#passive#benchmark##
Passive#Equity#Portfolio#Management#Strategies##
Index#Portfolio#Construction#Techniques##
Full#Replication##
o All#securities#in#the#index#are#purchased#in#proportion#to#weights#in#the#index##
o This#helps#ensure#close#tracking##
o Increases#transaction#costs##
Sampling##
o Buys#a#representative#sample#of#stocks#in#the#benchmark#index#according#to#their#weights#in#
the#index##
o Fewer#stocks#=#lower#commission##
Quadratic#Optimization##
o Historical#information#on#price#changes#and#correlations#between#securities#are#input#into#a#
computer#program#that#determines#the#composition#of#a#portfolio#that#will#minimize#
tracking#error#with#the#benchmark##
Tracking#Error#and#Index#Portfolio#Construction##
The#goal#of#passive#manager#is#to#minimize#the#portfolio's#return#volatility#relative#to#the#index#(i.e.#
minimize#tracking#error)##
Tracking#error#measure##
o Return#differential#in#time#period#t##
#
##
#
Methods#of#Index#Portfolio#Investing##
Index#Funds##
o Replicate#the#composition#of#the#particular#index#exactly##
o Will#by#exact#securities#comprising#the#index#in#their#exact#weights##
o Change#these#positions#anytime#the#composition#of#the#index#itself#has#changed##
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ETFs##
o They#can#be#bought#or#sold#like#common#stock##
o Notable#ETF#examples##
S&P#500#Depository#Receipts##
Regional#or#country#ETFs##
Sector#ETFs##
Active#Equity#Portfolio#Management#Strategies##
Goal#is#to#earn#a#portfolio#return#that#exceeds#the#return#of#a#passive#benchmark#the#return#of#a#
passive#benchmark#portfolio##
Fundamental#Strategies##
Top-Down#vs.#Bottom-Up#Approaches##
3#Generic#Themes##
o Time#the#equity#market##
o Shift#funds#among#different#equity#sectors#and#industries#or#investment#styles##
o Do#stock#picking##
Contrarian#Investment#Strategy##
o The#belief#that#the#best#time#to#buy#stock#is#when#everyone#is#bearish#about#it##
Price#Momentum#Strategy##
o Focus#on#the#trend#of#past#prices#alone#and#makes#purchase#and#sales#decisions#accordingly##
Anomalies#and#Attributes##
Earnings#Momentum#Strategy##
o Momentum#is#measured#by#the#difference#of#actual#EPS#to#the#expected#EPS##
o Buy#shares#with#accelerating#earnings#and#sell#shares#with#disappointing#earnings##
Calendar-Related#Anomalies##
o The#weekend#effect##
o The#January#effect##
Firm-specific#attributes##
o Firm#size##
o P/E#and#P/BV#ratios##
Investment#Styles##
Value#vs.#Growth##
o A#growth#investor#focuses#on#the#current#and#future#economic#"story"#of#a#company#with#
less#regard#to#the#share#valuation##
o Focus#on#EPS#and#its#economic#determinants##
o Value#investor#focuses#on#share#price#in#anticipation#of#a#market#correction#and#improving#
company#fundamentals##
o Have#higher#returns#than#growth#stocks#but#not#consistent##
o Assume#P/E#ratio#is#below#its#natural#level##
Style#Analysis##
#
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