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18 Cards in this Set

  • Front
  • Back

What are the benefits and costs to small investors in a mutual fund

Benefits: diversification, economies of scale, divisability, liquidity

costs: no insurance, dilution, fees and expenses

Why can closed end funds sell at a different price than the net asset value while open-end funds do not

closed end fund shares are not redeemed by the fund manager. They must be sold in the secondary market. Because of this, shares may trade at a substantial premium or discount to the NAV

What is a 12b-1 fee?

Annual marketing or distribution fee on a mutual fund. The 12b-1 fee is considered an operational expense and is included in a funds expense ratio

What are advantages and disadvantages of an Exchange Traded fund


1. traded on exchange so can be sold or purchased at any time

2. no capital gain trigger

3. allow large shareholders to redeem shares if the sale wouldd cause a move in the price away from NAV (does not create tax event)

4. bought through stock brokers- eliminates cost to the cosponsor of marketing the fund to ind small investors and can reduce fees


1. brokerage commission charged when buying and selling

2. few actively managed ETFS

Give examples of asset classes that hedge funds can invest in and mutual funds will not

Hedge funds are managed more aggressively- mutual funds can't take highly leverage positions

-can invest in exotic positions such as foreign farm land, commodities (nickel)

What is the definition of institutional funds? How do they differ in the CF rights and ownership form mutual funds and hedge funds?

-fund that targets high value investors with low management fees, but very high minimum investing requirements (dif than hedge)

-aim to manage money for large inst investors such as pension or endowment


What does the law get involved with regulation of mutual funds but not other types of funds

bc others are considered to knowledgeable and less likely to make uneducated investments

-mutual funds are legal entities (structured like a corporation)

What are the possible heuristics in constructing a momentum portfolio

anchoring and adjustment heuristic: ind estimate the expected future value by making adjustments to a reference price (anchored value)

-investors mnifest these tendency by anchoring to their current info (stock price) and being slow to adjust expected future values in light of new info

How are momentum portfolios constructed and what are the risks

Momentum: rank stocks by geometric return each month and determine top and bottom deciles (winners/losers). Buy winners and short sell losers

Risks: high turnover, time intensive, market sensitive, manager dependent strategy

What is a factor model (describe the bases)

Factor model says that there is some number of driver of the returns of the assets plus some idiosyncratic risk not associated with the drivers

1. asset pricing: determine the normal return for a given level of risk

2. benchmark: represent the return of a passive portfolio that is similar to the evaluated portfolio

3. security analysis: determine the factors that are relevant for security prices

4. industry/market analysis: determine whether any subset of assets have outperformed mkt

5. portfolio attribution: to attribute the returns of an actively managed portfolio to exposure in various mkt segments

6. forecasting: estimate expected return quant risk management --> simplify number of risk factors in building a portfolio

Where do factors come from in factor model?

1. pure statistical model: only input is the correlation matrix of returns

2. prespecified economy wide variables: value of factors are same across all firms (dif response to variables for each firm- interest rates, inflation_

3. prespecified firm variable- value of factors are dif for each firm (leverage, size growth in earnings- firm has constant response )

4. style model: value of factors are same across all firms- factors are chosen to represent an asset class

Strengths and weaknesses of factor model

strengths: objective determinant of alpha and risk, assumptions are clear, flexible, risk analysis and portfolio management is simplified, good basis for discussion, cheaper than analysts

weaknesses: must know factors, some firms have nonlinear relationships with factors, difficult to incorporate judgment (factors change, firms specific events cannot incorporate), impossible to incorporate non quant info, statistical assumptions are never quite true

What is equity style analysis and how is it used in the management of equity portfolios?

-method used to identify and describe the characteristics of an investment portfolio

-three dimensional time series evaluation of portfolios holdings, relative to other portfolios in the same asset class, relevant benchmarks and existing style groups

What was the frame that Madoff developed over time?

-investment fund run by a conservative, responsible portfolio manager had spent years at public service regulating industry and had years of personal service to a religious community

What is a split strike strategy and why did it feed Madoffs frame

-created by selling slightly out the money calls and buying and equal number of slightly out of the money puts of the same underlying stock and expiration date

Risk vs uncertainty

risk: don't know what is going to happen next but do know distribution

uncertainty- do not know distribution

The south sea island bubble coined the phrase greater fool theory, what does this mean?

theory that states it is possiblle to make money by buying securities whether overvalued or not, and later selling them at profit because there will always be someone (a bigger or greater fool) who is willing to pay the higher price

What is the closed end fund puzzle and how can behavior finance explain it

closed end fund puzzle- kicks in bc these funds often trade at a discount to their net asset value months after they are offered and traded on public exchanges

explanations: investor sentiment- most us shareholders of close end funds are retail investors that sometimes are not as rational as the market would like to be-- closed end fund prices trade away from the NAV of their underlying holdings