FIN 403 Final Exam
appraisal ratio
- A performance measure closely related to Jensen's alpha. - Numerator: manager's ability to earn a return in excess of the benchmark or risk-adjusted basis. - Denominator: tracking error, the idiosyncratic risk or the "cost" of active management.
Jensen's alpha
- A positive alpha indicates the portfolio manager outperforms the benchmark on a risk-adjusted basis. - It represents the maximum additional "fee" that you should be willing to pay the portfolio manager.
growth-based approach
- Believe future earnings growth justifies higher current valuation multiples. - Requires market to continue paying a premium for the greater growth prospects. - Risk that expected growth fails to materialize.
Attribution analysis
- Characterizes the source of a manger's performance relative to a benchmark. - Performance is decomposed into allocation effect, selection effect, and the interaction between the two.
Bottom-Up strategy
- Emphasizes the selection of securities without any initial market or sector analysis. - Form a portfolio of equities that can be purchased at a substantial discount to what their valuation model indicates they are worth
Multifactor approach
- Use value and momentum factors as an example. - "Mix" and "Integrate" approaches
performance appraisal
- Was the performance due to luck or skill? - Explains the proportion of returns due to manager skill. - Uses the results of risk, return and attribution analysis to assess the quality of a portfolio's performance.
performance measurement
- What was the performance? - Measures the excess performance of a portfolio.
performance attribution
- Why did the performance occur - Explains how the excess performance or risk was achieved. - Identifies the drivers of investment returns.
bearish
A contrarian investment strategy is based on the belief that the best time to buy is when other investors are ___________
long; short
A long/short hedged portfolio is typically formed by _______ing the best group and ______ing the worse group.
sortino
A practitioner may use the __________ ratio rather than the Sharpe ratio if he is measuring option writing or if the return distributions are not symmetrical.
positive
A significantly __________ estimate of γ indicates positive timing ability
abnormal
A stock's alpha measures the stock's ________ return
risk premium
According to CAPM, the __________ an investor expects to receive on any stock or portfolio is directly related to the beta of the stock
CAPM
An individual asset's expected return is completely determined by how it covaries with the return to the market portfolio
fundamental approaches
Begin with financial statements, obtain understanding of profitability, cash flows, analyze the business model, and estimate the stock's intrinsic value.
alpha
CAPM ______ is something you get when the model cannot fully explain the return.
fails
CAPM _______ to explain returns on characteristics such as size, momentum, etc.
anomalies
CAPM has several well-known empirical shortcomings, aka ________
contrarian
Companies in which ____________ managers invest are frequently depressed cyclical stocks with low or even negative earnings or low dividend payments.
investment
Factors are ________ styles that deliver high returns over the long run
Signals
Factors are often the raw ingredients of quantitative investing and are often referred to as _________
Jensen's alpha
Funds with a positive ____________ have superior skill and those that have negative __________ generate performance that is inferior to a passive strategy of holding the market portfolio.
zero
If CAPM is true, alpha should be _________.
momentum
Investments that have performed relatively well, continue to perform relatively well; those that have performed relatively poorly, continue to perform relatively poorly.
additional
Investors like high alphas because it is an ___________ return you get.
quantitative approaches
Involve analyst judgment at the decision stage, but largely replace the reliance on human judgment and discretion with systematic processes that are often dependent on computer programming for execution.
CAPM
Jensen's performance measure is motivated by the ________
TAA (Tactical Asset Allocation)
One potential approach to generating superior investment performance is through ____________ or market/sector timing.
momentum
Possible explanations for ________ include the risk-based story and behavioral story.
higher
Small-cap stocks must have a ________ beta than large-cap stocks if CAPM is true
momentum
The _________ strategy works whether a market is in an upswing or downswing
Multifactor
The anomalies that result from CAPM have motivated ________ models.
short
The hedged portfolio requires managers to _______ stocks.
tracked
The performance of the hedged long/short portfolio is _______ overtime
factors
The risk premiums don't come for free as _________ can underperform in the short run.
fundamental
Top-Down and Bottom-Up strategies are both _________ strategies.
GARP (Growth at a Reasonable Price)
Used by investors who seek out companies with above-average growth that trade at reasonable valuation multiples.
higher
Value stocks must have a ________ beta than growth stocks if CAPM is true.
Bottom-Up
Value-based and growth-based approaches are both __________ strategies
Sharpe
_______ ratio is an absolute reward-to-risk measure
Buffet
________ invests in high-quality value stocks.
Value
________ stocks are cheap in terms of their price relative to their earnings, cashflows, dividends and book value.
Beta
_________ is the only thing that can predict stock returns in a CAPM setting, the only measure of risk for CAPM
information
_________ ratio is a relative reward-to-risk measure
factor-based strategy
__________ aims to identify significant factors that can predict future stock returns and to construct a portfolio that tilts towards such factors.
tracking risk
__________ arises primarily from mismatches between a portfolio's risk profile and the benchmark's risk profile
High-quality value
__________ investing: investing in cheap stocks + consistent earnings power, above-average ROE, financial strength and exemplary management.
income
__________ investing: investing in high dividend yields and positive dividend growth rates.
contrarian
__________ investing: purchase and sell shares against prevailing market sentiment
Multifactor
__________ models can help analyze the sources of an active manager's returns relative to a benchmark.
Growth
__________ stocks are expensive in terms of their price relative to their earnings, cashflows, dividends and book value.
tracking risk
____________ = standard deviation of active returns
Relative value
____________ investing: comparing stocks' value indicators (P/E, P/B) to the average valuation of companies in the same industry sector to identify stocks that offer value relative to their sector peers.
deep-value
____________ investing: undervalued companies that are available at extremely low valuation relative to their assets (low P/B, P/E). such companies are often those in financial distress.
tracking risk
a measure of the variability with which a portfolio's return tracks the return of a benchmark index.
factor
a variable or characteristic with which individual asset returns are correlated
value
active return measures _______ added
tracking error/risk
active risk aka ___________
fundamental approaches
based on research into companies, sectors, or markets and involve the application of analyst discretion and judgement
long
buy
growth-based approach
buy stocks that are expected to grow faster than their industry or faster than the overall market, as measured by revenues, earnings, or cash flow.
value factor
cheap stocks earn higher returns than expensive stocks
Hedged portfolio (long-short portfolio)
choose appropriate benchmark: S&P500, Russell 3000, MSCI World Index; rank stocks by the selected factor
Treynor ratio
compares a mutual fund's average realized excess return to its systematic risk.
Top-Down strategy
country and geographic allocation, sector and industry rotation.
integrate approach
evaluate stocks based on their aggregate value and momentum ranking.
quality factor
financially healthy companies have earned a return above relatively unhealthy companies.
high
growth stocks have a ________ P/E ratio
low
growth stocks have a ________ book-to-market ratio
allocation effect
impact of manager's decision to over- or under weigh specific asset class or sectors
selection effect
impact or manager's choice of securities relative to the benchmark within each asset class or sector
beta
in CAPM, there is only one type of risk: market risk is firm _________
1
market beta
risk-based story
momentum's higher returns are compensation for some unique risk associated with investments that have recently outperformed
style analysis
no intercept and the exposure factors need to sum to 1
Sortino ratio
offers the ability to accurately assess performance when return distributions are not symmetrical.
long-only approach
overweigh stocks that rank highly on a certain factor and underweight stocks that rank poorly on that factor. Select the top third of stocks that rank highly on a certain factor.
factor
quantitative approaches are ________-based strategies
short
sell
mix approach
separately determine the value stocks and momentum stocks and include both.
behavioral story
slow to react to new information, different investors receive news from different sources, and react to news over different time horizons and in different ways. Possible overreaction to information
size factor
small-cap stocks earn higher returns than large-cap stocks
momentum factor
stocks with strong recent performance have earned a return above stocks with weak recent performance
active weights
the _______ are the differences in the managed portfolio's weights and the benchmark's weights.
Sharpe
the _________ ratio compares a mutual fund's average realized excess return to its total risk. It assumes investors are indifferent between upside and downside volatility, and returns are not skewed.
Sharpe
the ___________ ratio is unaffected by the addition of cash or leverage in a portfolio
Treynor ratio
the ______________ ignores unsystematic risk and should not be used to assess negative beta portfolios.
momentum strategy
the phenomenon that stocks which have performed well in the past relative to other stocks (winners) historically generate higher returns than stocks that have performed relatively poorly (losers
PEG ratio (P/E-to-growth)
the stock's P/E divided by the expected earnings growth rate.
Style analysis
used to explain the observed variation in portfolio returns in terms of the returns for a series of benchmark portfolios
low
value stocks have a ________ P/E ratio
high
value stocks have a ________ book-to-market ratio
market timing
want to invest more in the stock market when it does well.
passive
when tracking risk is < 1, it is most likely ________
