Lecture 13. Active vs. Passive Asset
Management
True/False: A strategy of Passive Equity Portfolio Management is long term buy and
hold strategy? - answer true
True/False: A strategy of active Equity Portfolio Management is usually tracking an
index over time? - answer false
True/False: A strategy of Passive Equity Portfolio Management is to design to match
market performance? - answer true
True/False: A strategy of active Equity Portfolio Management is when a manager is
judged on how well they track the target index - answer false
Active Equity Portfolio Management - answerattempts to outperform a passive
benchmark portfolio on a risk-adjusted basis
Passive Equity Portfolio Management Strategies replicate: - answerthe performance of
an index
Passive Equity Portfolio might slightly underperform the target index due to
________________ and ____________________. - answerfees; commissions
the more frequently you trade, the ____________ you pay in commissions? -
answermore
commissions are typically a flat fee no matter how large or small the trade, but what
does this implicate for the percentage cost per trade for larger and smaller trades? -
answerthe percentage cost per trade will be larger for smaller trades and smaller for
larger trades
how are ETF expenses usually stated? - answerin terms of fund's operating expense
(OER)
Expense ratio - answerannual rate the fund charges on the total assets it holds to pay
for portfolio management, administration and other costs.
Since the OER is an ongoing expense, it's relevant for all investors, but who is it
particularly relevant for? - answerlong-term, buy-and-hold investors
Bid/Ask Spread - answerthe difference between the "bid" and "ask" prices
, - think of it as a transaction cost similar to commissions except that the spread is built
into the market price and is paid on each roundtrip purchase and sale
What is the "bid" in Bid/Ask Spread? - answerthe market price at which the same ETF
can be sold
What is the "ask" in Bid/Ask Spread? - answeris the market price at which an ETF can
be bought
- aka "offer"
the larger the Bid/Ask Spread and the more frequently you trade, the more or less
relevant this cost becomes? - answermore
Index Portfolio Strategy Construction Techniques - answer- Full Replication
- Sampling
- Quadratic Optimization
Full Replication - answerall securities in index are purchased in proportion to weights in
the index
- helps ensure close tracking
what does full replication do to transaction costs? - answerincreases transaction costs,
particularly with dividend reinvestment
Sampling - answerbuys a representative sample of stocks in the benchmark index
according to their weights in the index
in sampling, what does having fewer stocks mean for commissions? - answermeans
lower commissions
reinvestment of dividends is ___________ difficult in sampling - answerless
when not tracking the index as closely it can lead to: - answersome tracking error
Tracking error - answerdifference between a portfolio's returns and the benchmark or
index it was meant to mimic or beat
Quadratic Optimization (Markowitz Analysis) - answerhistorical information on price
changes are input into a Markowitz model that determines the composition of a portfolio
that will minimize tracking error with the benchmark
what does Quadratic Optimization (Markowitz Analysis) rely on? - answerhistorical
covariances, which change over time, leading to failure to track the index
Methods of Index portfolio investing - answer- Index funding
- Exchange - Traded Funds
Management
True/False: A strategy of Passive Equity Portfolio Management is long term buy and
hold strategy? - answer true
True/False: A strategy of active Equity Portfolio Management is usually tracking an
index over time? - answer false
True/False: A strategy of Passive Equity Portfolio Management is to design to match
market performance? - answer true
True/False: A strategy of active Equity Portfolio Management is when a manager is
judged on how well they track the target index - answer false
Active Equity Portfolio Management - answerattempts to outperform a passive
benchmark portfolio on a risk-adjusted basis
Passive Equity Portfolio Management Strategies replicate: - answerthe performance of
an index
Passive Equity Portfolio might slightly underperform the target index due to
________________ and ____________________. - answerfees; commissions
the more frequently you trade, the ____________ you pay in commissions? -
answermore
commissions are typically a flat fee no matter how large or small the trade, but what
does this implicate for the percentage cost per trade for larger and smaller trades? -
answerthe percentage cost per trade will be larger for smaller trades and smaller for
larger trades
how are ETF expenses usually stated? - answerin terms of fund's operating expense
(OER)
Expense ratio - answerannual rate the fund charges on the total assets it holds to pay
for portfolio management, administration and other costs.
Since the OER is an ongoing expense, it's relevant for all investors, but who is it
particularly relevant for? - answerlong-term, buy-and-hold investors
Bid/Ask Spread - answerthe difference between the "bid" and "ask" prices
, - think of it as a transaction cost similar to commissions except that the spread is built
into the market price and is paid on each roundtrip purchase and sale
What is the "bid" in Bid/Ask Spread? - answerthe market price at which the same ETF
can be sold
What is the "ask" in Bid/Ask Spread? - answeris the market price at which an ETF can
be bought
- aka "offer"
the larger the Bid/Ask Spread and the more frequently you trade, the more or less
relevant this cost becomes? - answermore
Index Portfolio Strategy Construction Techniques - answer- Full Replication
- Sampling
- Quadratic Optimization
Full Replication - answerall securities in index are purchased in proportion to weights in
the index
- helps ensure close tracking
what does full replication do to transaction costs? - answerincreases transaction costs,
particularly with dividend reinvestment
Sampling - answerbuys a representative sample of stocks in the benchmark index
according to their weights in the index
in sampling, what does having fewer stocks mean for commissions? - answermeans
lower commissions
reinvestment of dividends is ___________ difficult in sampling - answerless
when not tracking the index as closely it can lead to: - answersome tracking error
Tracking error - answerdifference between a portfolio's returns and the benchmark or
index it was meant to mimic or beat
Quadratic Optimization (Markowitz Analysis) - answerhistorical information on price
changes are input into a Markowitz model that determines the composition of a portfolio
that will minimize tracking error with the benchmark
what does Quadratic Optimization (Markowitz Analysis) rely on? - answerhistorical
covariances, which change over time, leading to failure to track the index
Methods of Index portfolio investing - answer- Index funding
- Exchange - Traded Funds
