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1、Chapter 17,EQUITY-PORTFOLIO MANAGEMENT,Chapter 17 Questions,What are the two generic equity portfolio management styles? What are three techniques for constructing a passive index portfolio? What three generic strategies can active equity-portfolio managers use? How does the goal of a passive equity
2、-portfolio manager differ from the goal of an active manager?,Chapter 17 Questions,What investment styles may portfolio managers follow? In what ways can investors use information about a portfolio managers style? What skills should a good value portfolio manager possess? A good growth portfolio man
3、ager?,Chapter 17 Questions,How can futures and options be useful in managing an equity portfolio? What strategies can be used to manage a taxable investors portfolio in a tax-efficient way? What are four asset allocation strategies?,Generic Portfolio Management Strategies,Passive equity portfolio ma
4、nagement Long-term buy-and-hold strategy Usually track an index over time Designed to match market performance Manager is judged on how well they track the target index Active equity portfolio management Attempts to outperform a passive benchmark portfolio on a risk-adjusted basis,Passive Equity Por
5、tfolio Management Strategies,Attempt to replicate the performance of an index May slightly underperform the target index due to fees and commissions Strong rationale for this approach Costs of active management (1 to 2 percent) are hard to overcome in risk-adjusted performance Many different market
6、indexes are used for tracking portfolios,Passive Equity Portfolio Management Strategies,Not a simple process to track a market index closely Three basic techniques: Full replication Sampling Quadratic optimization or programming,Passive Equity Portfolio Management Strategies,Full Replication All sec
7、urities in the index are purchased in proportion to weights in the index This helps ensure close tracking Increases transaction costs, particularly with dividend reinvestment,Passive Equity Portfolio Management Strategies,Sampling Buys representative sample of stocks in the benchmark index according
8、 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” Tracking error will diminish as the number of stocks grows, but costs will grow (tradeoff),Passive Equity Portfo
9、lio Management Strategies,Quadratic Optimization 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 This relies on historical correlations, w
10、hich may change over time, leading to failure to track the index,Passive Equity Portfolio Management Strategies,Completeness Funds Passive portfolio customized to complement active portfolios which do not cover the entire market Performance compared to a specialized benchmark that incorporates the c
11、haracteristics of stocks not covered by the active managers,Passive Equity Portfolio Management Strategies,Dollar-cost averaging Purchasing fixed dollar investments per period over time Prevents buying too many shares at high prices and too few shares when prices are low Often part of a passively ma
12、naged portfolio strategy,Active Equity Portfolio Management Strategies,Goal is to earn a portfolio return that exceeds the return of a passive benchmark portfolio, net of transaction costs, on a risk-adjusted basis Need to select an appropriate benchmark Practical difficulties of active manager Tran
13、sactions costs must be offset by superior performance vis-vis the benchmark Higher risk-taking can also increase needed performance to beat the benchmark,Active Equity Portfolio Management Strategies,Three Strategies Market timing - shifting funds into and out of stocks, bonds, and T-bills depending
14、 on broad market forecasts and estimated risk premiums Shifting funds among different equity sectors and industries or among investment styles to catch hot concepts before the market does Stockpicking - individual issues, attempt to buy low and sell high,Active Equity Portfolio Management Strategies
15、,Global Investing: Three Strategies Identify countries with markets undervalued or overvalued and weight the portfolio accordingly Manage the global portfolio from an industry perspective rather than from a country perspective Focus on global economic trends, industry competitive forces, and company
16、 strengths and strategies,Active Equity Portfolio Management Strategies,Sector Rotation Position a portfolio to take advantage of the markets next move Screening can be based on various stock characteristics: Value Growth P/E Capitalization Key is to determine what to “rotate into”,Active Equity Portfolio Management Strategies,Style Investing Construct a portfolio to capture one or more of the characteristics of equity securities Small-cap stocks, low-P/E stocks, etc Value stocks (those that ap
