1. Understand the concepts of market efficiency, active portfolio management as well as the empirical evidence in favor/against the active approach.
2. Identify the approaches involved in the security selection process,
3. Distinguish between different equity investment styles,
4. Construct an Investment Policy Statement
5. Build and monitor portfolios using the portfolio analytics system on Bloomberg (PORT function),
6. Implement equity portfolio strategies with trade-off for alphas against departure from full diversification,
7. Evaluate portfolio performance against a benchmark, including return attribution.
Additional Assurance of Learning (“AOL”) objectives:
LO1A. Demonstrate an international mindset
LO1C. Communicate effectively in English
LO2A. Assess the values of the organization in which they work
LO3A. Breakdown complex organizational problems using the appropriate methodology
LO4C. Convey powerful messages using contemporary presentation techniques
LO7C. Effectively apply in-depth specialized knowledge to take advantage of contemporary opportunities in their professional field
Under market efficiency, there would be no reward to security selection, since all available information would already be reflected in assets’ prices at all times. Thus, risk-averse investors would only be interested in efficient risk diversification and invest passively according to their investment style, e.g. by following a broad market index. In contrast, active portfolio managers seek to “beat the market” by applying research efforts and their expertise to identify information that is not totally reflected in stock prices, i.e. finding under or over-valued stocks. They endeavour to construct portfolios that could outperform the market on a risk-adjusted basis.
Course outline:
Part I: Passive vs. active portfolio management – definition of passive and active portfolio strategies; index creation and tracking; the Efficient Market Hypothesis (EMH); empirical evidence on return predictability; building an Investment Policy Statement (IPS); investment styles in equity investing and active investment; “smart beta”: styles vs factors; portfolio performance evaluation, performance attribution, risk exposure.
Part II: Fundamental analysis and selection of common stocks: some equity portfolio strategies
Top-down approaches (macro/micro valuation of the stock market; industry/sector analysis; company analysis); Bottom-up approach (common approaches to equity selection based on multiples and other information).
Part III: Active Portfolio Construction – Asset allocation (active vs. passive portfolio; active securities); setting capital market expectations and integration of the manager’s private views;Forecast precision, tracking error and restriction of benchmark risk.
