Similar to the concept of smart beta, factors are specific characteristics or variables that can influence how investments perform in a portfolio. When using a factor-based strategy, the goal is to identify what might cause a stock's price to go…

Instead of picking individual stocks, top-down managers use broad market ETFs and contracts linked to financial instruments to adjust their portfolios. They put more money in markets they expect to do well and less in those expected to perform poorly….

In equity investments, whether a manager follows a fundamental or quantitative approach, they can further be classified as bottom-up or top-down investors. Bottom-up strategists focus on individual company data, while top-down approaches start with macroeconomic factors that could impact multiple…

Active Equity Investing Active equity investing aims to outperform a passive benchmark. At a high level, active approaches can be categorized into two main types: Fundamental Approach. Quantitative Approach. Fundamental Approach The fundamental approach aims to generate alpha by picking…

Attribution Analysis Attribution analysis is covered in further detail in other sections of the curriculum. Since it pertains to explaining sources of risk and return, attribution analysis is a method of decomposing the investments in a portfolio. Besides, it maps…

This section builds upon the previous concept of the ‘u-shape’change in tracking error – the initial improvement and subsequent reversal of tracking error as more index securities are added to a portfolio. Several factors contribute to tracking error: Management fees:…

Full Replication Full replication entails purchasing all the individual securities within an index with weightings that closely mirror the index itself. Some indices are better suited for full replication than others, depending on certain factors. Several factors contribute to making…

Pooled investments encompass mutual funds and ETFs, topics extensively covered in other parts of the curriculum. Both open-ended and closed mutual funds, along with ETFs, provide various avenues for mirroring index performance. Derivatives-based Strategies Derivatives, such as futures, forwards, options,…

Passive Investing Alternatives Pure passive equity investing involves purchasing and holding an index to replicate its performance at a minimal cost. The cost element is crucial – excessive expenses in replication can negatively impact returns over the long term. Larger…

Rules Based: A benchmark should have well-defined criteria for including and excluding stocks, including how they are weighted and rebalanced. These rules need to be objectively implemented to allow investors to replicate the index's performance. Transparent: The rules mentioned above…