a) What is smart beta?
Before we can start describing Smart Beta, we must state that Beta is linked with the passive investment strategy while Alpha is linked with the active investment strategy.
A smart beta investment strategy embraces a passive strategy but with a twist. It is related to a passive investment strategy because it is rule based due to no influence from portfolio managers and thus, following the market and does not trade stocks frequently, but still takes into account stock selection away from CAPM based on the analysis of factors, such as dividends, cash flow, total sales and book value (Draper, 2016). Smart beta funds offer an improved risk return trade off over alpha and beta based funds. Smart beta, also rather than looking …show more content…
This is why this has gained a great deal of popularity throughout the last few years, reaching a multibillion-dollar market. Smart Beta differs also from the standard beta derived portfolios due to the fundamental theory by which stocks are bought and sold in the said portfolio. In a standard beta portfolio as it follows the CAPM standard such as capital markets as S&P500, it sells of low pricing stocks whilst buying high-valued ones which are making headway in the market. This in theory goes against what is profitable. On the other hand, the Smart beta portfolio does the opposite and thus, buys shares which have low-value with potential to grow whilst selling off high valued stocks for a profit. This is done through the screening of these stocks by factors which have been mentioned above. Another major difference between a Beta and smart Beta market is that when it comes to stock selection, the standard only looks at the stock in relation to the whole market unlike a stock selection in a smart beta market where it is referred to within the context of its sector. Therefore, because it is a partially active fund, the Smart Beta model gives the investor a higher risk-return trade-off without incurring any extra portfolio management expenses which would render it unprofitable to small …show more content…
Looking onto alpha versus smart beta market, as investors increase their demand for smart beta, active investment portfolio managers must reconsider other ways onto how to keep a hold of the market. As people move on smart beta strategies, fund managers must reduce their management fees and cost together with working harder to generate a greater alpha and therefore work harder for the best interest of the investors. Only by doing so, will they be able to stay relevant against an ever-growing smart beta market. (UBS Asset Management,
Before we can start describing Smart Beta, we must state that Beta is linked with the passive investment strategy while Alpha is linked with the active investment strategy.
A smart beta investment strategy embraces a passive strategy but with a twist. It is related to a passive investment strategy because it is rule based due to no influence from portfolio managers and thus, following the market and does not trade stocks frequently, but still takes into account stock selection away from CAPM based on the analysis of factors, such as dividends, cash flow, total sales and book value (Draper, 2016). Smart beta funds offer an improved risk return trade off over alpha and beta based funds. Smart beta, also rather than looking …show more content…
This is why this has gained a great deal of popularity throughout the last few years, reaching a multibillion-dollar market. Smart Beta differs also from the standard beta derived portfolios due to the fundamental theory by which stocks are bought and sold in the said portfolio. In a standard beta portfolio as it follows the CAPM standard such as capital markets as S&P500, it sells of low pricing stocks whilst buying high-valued ones which are making headway in the market. This in theory goes against what is profitable. On the other hand, the Smart beta portfolio does the opposite and thus, buys shares which have low-value with potential to grow whilst selling off high valued stocks for a profit. This is done through the screening of these stocks by factors which have been mentioned above. Another major difference between a Beta and smart Beta market is that when it comes to stock selection, the standard only looks at the stock in relation to the whole market unlike a stock selection in a smart beta market where it is referred to within the context of its sector. Therefore, because it is a partially active fund, the Smart Beta model gives the investor a higher risk-return trade-off without incurring any extra portfolio management expenses which would render it unprofitable to small …show more content…
Looking onto alpha versus smart beta market, as investors increase their demand for smart beta, active investment portfolio managers must reconsider other ways onto how to keep a hold of the market. As people move on smart beta strategies, fund managers must reduce their management fees and cost together with working harder to generate a greater alpha and therefore work harder for the best interest of the investors. Only by doing so, will they be able to stay relevant against an ever-growing smart beta market. (UBS Asset Management,