China Fire

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2) An investor who is testing the performance of a portfolio of stocks used 60 months of historical data and obtained the following result using i) Jensen’s alpha model and ii) Fama-French model (the values in parentheses are t-statistics associated with coefficients directly above them):

i)

[pic 1]

ii)

[pic 2]

Interpret the performance of investor’s portfolio according to each of the models and outline any reasons for differences or similarities in your conclusions.

What numbers mean, out or under performance. Why are values different? Once we take into account blablab, sig outperform. Onve we take into account blablabla, insig alpha, so no picking skill.

3) Compare the use of Sharpe ratio and Information ratio for assessing performance of hedge funds.

4) Compare and contrast Sharpe ratio and Sortino ratio.

5) When is more appropriate to use Sharpe ratio rather then Treynor ratio and when would portfolio rankings according to the two ratios be the same?

6) Is there persistence in performance among UK mutual funds? How would you measure persistence? Explain using one method of your choice.

7) Explain why Jensen’s alpha is not an appropriate measure of performance of market timing funds. Describe one of the more appropriate measures of your choice.

Equity investment styles, Style rotation, TAA with Styles and Sector rotation

- Classification and determination of equ ity investment styles (value, growth, GARP, market-oriented and small size and sub-styles within each one)

- Reasons for value and small cap outperformance

- Characteristics of stocks within each style

- How can one determine if there is a style (style mathematics, style betas)

- Signals for style rotation: real GDP forecast model, forecast P/E spread model, earnings-revision model, residual risk spread and other signals (seasonal, technical, fundamental and economic indicators such as yield curve etc.) + hypothesis on which models are based

- Profitability of value/growth and large/small style rotation strategies in the UK

- Advantages and Disadvantages of TAA with styles

- Sector rotation vs. style rotation

??????regression. the construction of variables. (a-b or b-a) Beta positive and significance.

Pairs trading: beta matching

Uk case study in style rotation. Paper in the note. The model they use, variables, results.

The exam question…January effect, which stock to pick. Pf don’t rotate: risk constraint, transaction cost blablabla…

Is it more expensive for rotate than style??? Probably sth else…

Sector rotation overlaps style rotation. You might be unknowing style rotating due to sector changes over time.

Styles are noy exclusive to each other. Or saying that some stocks are not extreme…

Sample questions:

- Value and growth investors cannot hold the same stock at the same point in time. Is this statement true or false? Explain.

- What are the ch aracteristics of stocks that you would select for 1) an equity income fund and 2) growth fund?

- Explain the GARP approach to investing.

- Using a price-to-book ratio of FTSE 350 stocks, explain how one can construct a value and growth portfolio.

- Explain the procedure that one can use to identify the presence of a style in a portfolio of stocks. What is the use of style betas obtained through such a procedure?

- Explain the style timing models based on economic cycle hypothesis and mean reversion hypothesis.

- If the difference between price/earnings ratios of value and growth stocks is expected to narrow, which group of stocks would you prefer to hold in your portfolio? Explain.

- Tactical asset allocation with style is more expensive strategy to use than style rotation. Is this true or false? Explain. What are the disadvantages of such a strategy?

- Briefly explain what we mean by sector rotation and how it is similar to style rotation.

Equity Index Tracking

- Advantages of an index fund

- Types of indices (market capitalisation-, fundamental-, price- weighted and unweighted index: construction n and suitability for use in index tracking)

- Free floating rules

- Fundamental indexation/smart beta

- Replicating an index portfolio: appro aches (full replication, sampling and synthetic indexation)

- Sampling methods for constructing a replicating portfolio: optimisation, stratified sampling and capitalisation methods

- Tracking error

- Market Impact

- Synthetic index fund: advantages and disadvantages

- Return enhancement: stock lending and synthetic indexation

- Combination of Active and Passive Management: Tilted index funds, Partial index exposure through use of futures, asset allocation when rebalancing

- ETFs (slides from Lecture 10)

Comparson between etf mutual fund and index tracking fund.

Free floatation rule

Sample questions:

- Empirical evidence suggests that tilted index funds provide investors with returns marginally above the stock market index. Explain the rationale behind this strategy.

- Synthetic index funds have many disadvantages and as a consequence they are of little use. Is this statement