index
Full Replication
Securities in proportion
ensures close tracking
transaction costs (dividend reinvestment).
Ex. HDFC Nifty Index Fund
Sampling
A representative sample of stocks
Fewer stocks - lower commissions
Dividend Reinvestment less difficult
No close tracking so some tracking error.
Ex. HDFC Nifty Plus
t =Rpt Rbt
where Rpt= return to the managed portfolio in Period t
Rbt= return to the benchmark portfolio in Period t.
TE is measured as of t , normally annualized.
TE = P (P is the number of return periods in a year,
1.
2.
Index Funds
Exact replication in terms of securities &
weights
Low trading and management expense ratios
The advantage - an inexpensive way for
performance
Higher risk-taking needed to beat the BM ( it
also risk ).
Fundamental Strategies
Bottom-Up
Securities selection without any initial market or
sector analysis
Form a portfolio by purchasing equities at a
Fundamental Strategies
Fundamental Strategies
to 30%
Shorting creates the leverage needed, both
Technical Strategies
Calendar-Related Anomalies
The Weekend Effect (buy Monday sell Friday)
The January Effect ( invest in January)
Firm-Specific Attributes
Firm Size (Small firm produces higher risk adjusted return)
P/E and P/BV ratios (firms with lower P/E & P/BV produce bigger
risk adjusted returns than with firms having higher P/E & P/BV).
Vanguard
500 Index
Fund
MFS
Research
Fund
Mgmt App
Passive
Active
Exp Ratio
0.18%
1.04%
Port TO
12%
73%
5 Yr Ave.
Pre Tax ret
2.21%
3.56%
1.88%
2.10%
Tax Cost Ra
0.32%
1.41%
1 Yr Ave.
PTR
14.91%
15.46%
14.50%
8.55%
Tax Cost Ra
0.36%
5.98%
growth
Assumes constant P/E ratio
Style Analysis
Growth stocks
High P/E, possibly a price momentum strategy
2.
3.
Capital market conditions and investorspecific objectives & constraints ( e.g., risk
tolerance, investment horizon, tax status).
Combining the above information, select the
best portfolio.
Compare the actual performance with the
managers original expectations.
Following this comparison make adjustments to the
portfolio by including new information into the
optimization process.
Stock
Portfolio
value
Bond
01-01-15
6000
4000
10000
60
40
31-03-15
6300
4080
10380
60.69
39.31
SAA
6228
4152
10380
60
40
IAA
6300
4080
10380
60.69
39.31
5700
4160
9860
57.81
42.19
SAA
5916
3944
9860
60
40
IAA
5700
4160
9860
57.81
42.19
31-06-15