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Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,2020-12-18,#,Lecture Presentation Software,to accompany,Investment Analysis and Portfolio Management,Seventh Editionby,Frank K.Reilly&Keith C.Brown,Chapter 17,Lecture Presentation Software,1,Chapter 17-Equity Portfolio Management Strategies,Questions to be answered:,What are the two generic equity portfolio management styles?,What are three techniques for constructing a passive index portfolio?,How does the goal of a passive equity portfolio manager differ from the goal of an active manager?,What is a portfolios tracking error and how is it useful in the construction of a passive equity investment?,Chapter 17-Equity Portfolio,2,Chapter 17-Equity Portfolio Management Strategies,What is the difference between an index mutual fund and an exchange-traded fund?,What are the three themes that active equity portfolio managers can use?,What stock characteristics differentiate value-oriented and growth-oriented investment styles?,What is style analysis and what does it indicate about a managers investment performance?,Chapter 17-Equity Portfolio,3,Chapter 17-Equity Portfolio Management Strategies,What techniques are used by active managers in an attempt to outperform their benchmark?,What are differences between the integrated,strategic,tactical,and insured approaches to asset allocation?,How can futures and options be useful in managing an equity portfolio?,Chapter 17-Equity Portfolio,4,Passive versus Active Management,Passive equity portfolio management,Long-term buy-and-hold strategy,Usually tracks 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 versus Active Manageme,5,An Overview of Passive Equity Portfolio Management Strategies,Replicate the performance of an index,May slightly underperform the target index due to fees and commissions,Costs of active management(1 to 2 percent)are hard to overcome in risk-adjusted performance,Many different market indexes are used for tracking portfolios,An Overview of Passive Equity,6,Index Portfolio Strategy Construction Techniques,Full replication,Sampling,Quadratic optimization or programming,Index Portfolio Strategy Const,7,Full Replication,All securities in the index are purchased in proportion to weights in the index,This helps ensure close tracking,Increases transaction costs,particularly with dividend reinvestment,Full ReplicationAll securities,8,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,SamplingBuys a representative,9,Expected Tracking Error Between the S&P 500 Index and Portfolio Samples of Less Than 500 Stocks,Exhibit 17.2,500,400,300,200,100,0,2.0,1.0,3.0,4.0,Expected Tracking Error(Percent),Number of Stocks,Expected Tracking Error Betwee,10,Quadratic Optimization(or programming techniques),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,which may change over time,leading to failure to track the index,Quadratic Optimization(or pr,11,Methods of Index Portfolio Investing,Index Funds,Attempt to replicate a benchmark index,Exchange-Traded Funds,EFTs are depository receipts that give investors a pro rata claim on the capital gains and cash flows of the securities that are held in deposit by a financial institution that issued the certificates,Methods of Index Portfolio Inv,12,An Overview of 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,Practical difficulties of active manager,Transactions costs must be offset,Risk can exceed passive benchmark,An Overview of Active Equity P,13,Fundamental Strategies,Top-down versus bottom-up approaches,Asset and sector rotation strategies,Fundamental StrategiesTop-down,14,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,Sensitivity to economic variables,Sector RotationPosition a port,15,Technical Strategies,Contrarian investment strategy,Price momentum strategy,Earnings momentum strategy,Technical Strategies Contraria,16,Value versus Growth,Growth stocks will outperform value stocks for a time and then the opposite occurs,Over time value stocks have offered somewhat higher returns than growth stocks,Value versus GrowthGrowth stoc,17,Value versus Growth,Growth-oriented
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