Podcast
Questions and Answers
What is a characteristic of corporate bonds in the Australian bond market?
What is a characteristic of corporate bonds in the Australian bond market?
Which bond type is considered to be non-investment grade?
Which bond type is considered to be non-investment grade?
What approximate value does non-government bonds outstanding in the Australian bond market represent?
What approximate value does non-government bonds outstanding in the Australian bond market represent?
Why might small investors find bond investments challenging?
Why might small investors find bond investments challenging?
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What is a common practice for many corporate bond issues to improve their standing?
What is a common practice for many corporate bond issues to improve their standing?
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What is the main focus of strategic asset allocation (SAA)?
What is the main focus of strategic asset allocation (SAA)?
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What does tactical asset allocation (TAA) primarily rely on?
What does tactical asset allocation (TAA) primarily rely on?
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Which statement about the empirical studies on portfolio returns is accurate?
Which statement about the empirical studies on portfolio returns is accurate?
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What is a key characteristic of dynamic asset allocation (DAA) according to various interpretations?
What is a key characteristic of dynamic asset allocation (DAA) according to various interpretations?
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Why do most managers tend to struggle with market timing in tactical asset allocation?
Why do most managers tend to struggle with market timing in tactical asset allocation?
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Which of the following actions is most consistent with a passive management style?
Which of the following actions is most consistent with a passive management style?
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What does dynamic asset allocation (DAA) not typically involve?
What does dynamic asset allocation (DAA) not typically involve?
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How do managers typically respond when investment returns skew original asset allocation percentages?
How do managers typically respond when investment returns skew original asset allocation percentages?
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Which asset allocation strategy entails a fully passive management approach?
Which asset allocation strategy entails a fully passive management approach?
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What does Tactical Asset Allocation (TAA) primarily emphasize?
What does Tactical Asset Allocation (TAA) primarily emphasize?
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What is the primary objective when managers adopt a defensive asset allocation strategy?
What is the primary objective when managers adopt a defensive asset allocation strategy?
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In the asset allocation example, what percentage was allocated to equities?
In the asset allocation example, what percentage was allocated to equities?
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What aspect does the investment philosophy of a fund manager influence regarding asset allocation?
What aspect does the investment philosophy of a fund manager influence regarding asset allocation?
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Which strategy incorporates a target return or loss limitation?
Which strategy incorporates a target return or loss limitation?
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What is the first decision made by an investment fund manager when managing a pool of funds?
What is the first decision made by an investment fund manager when managing a pool of funds?
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What characterizes the trading strategy of an investment fund that follows an active management approach?
What characterizes the trading strategy of an investment fund that follows an active management approach?
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What is one advantage of investing in international equities compared to Australian shares?
What is one advantage of investing in international equities compared to Australian shares?
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Which method of stock selection is consistent with portfolio theory?
Which method of stock selection is consistent with portfolio theory?
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What might participants achieve in the Share Price Forecasting game?
What might participants achieve in the Share Price Forecasting game?
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What is the primary benefit of cash management trusts (CMT) for small investors?
What is the primary benefit of cash management trusts (CMT) for small investors?
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Which method of raising equity capital is NOT mentioned as a primary method?
Which method of raising equity capital is NOT mentioned as a primary method?
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When is the Share Price Forecasting game scheduled to be available for participation?
When is the Share Price Forecasting game scheduled to be available for participation?
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What is a characteristic common to both fundamental and technical analysis?
What is a characteristic common to both fundamental and technical analysis?
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What is the effect of equity representing a residual claim on a firm's cash flows?
What is the effect of equity representing a residual claim on a firm's cash flows?
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Which of the following is primarily a characteristic of bond ETFs compared to cash management trusts?
Which of the following is primarily a characteristic of bond ETFs compared to cash management trusts?
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In equity capital raising, which method may lead to a transfer of wealth from existing shareholders to new shareholders?
In equity capital raising, which method may lead to a transfer of wealth from existing shareholders to new shareholders?
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What is implied by the term 'equity risk premium'?
What is implied by the term 'equity risk premium'?
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Which characteristic is NOT typically associated with a dividend reinvestment plan?
Which characteristic is NOT typically associated with a dividend reinvestment plan?
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Which of the following statements is true regarding internal and external equity generation?
Which of the following statements is true regarding internal and external equity generation?
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Study Notes
Passive Management Styles
- Approximately 90% of portfolio returns are attributed to asset allocation rather than selection of specific assets.
- This suggests limited value in selecting individual stocks or properties within asset classes, aligning with theoretical diversification principles.
Strategic Asset Allocation (SAA)
- SAA involves setting target percentages for various asset classes.
- The aim is to identify efficient allocations and adopt a “buy and hold” strategy.
- Managers assume that asset classes are efficiently priced, indicating no abnormal profits from shifting investments between classes.
- Periodic rebalancing is common to maintain original asset allocation as returns fluctuate.
Tactical Asset Allocation (TAA)
- TAA is employed when managers believe certain asset classes are mispriced.
- Focuses on temporary mispricing, such as an overheated equities market compared to bonds.
- Managers aim to outperform passive benchmarks through market timing, making it an active investment approach.
- Empirical evidence suggests most managers struggle with effective market timing.
Dynamic Asset Allocation (DAA)
- DAA is used variably, often referring to rebalancing of portfolios under SAA and TAA strategies.
- Some use DAA to define market timing-driven asset switches.
- Other interpretations include strategies to replicate return distributions, such as implementing portfolio insurance or stop-loss approaches.
Asset Allocation Strategies Summary
- Four primary strategies range from fully passive to fully active:
- SAA with stock selection - buy & hold (passive)
- SAA with stock selection - active trading
- TAA with stock selection - buy & hold
- TAA with stock selection - active trading (fully active)
- Variations include target return incorporation or loss limitation in DAA strategies.
Investment Fund Manager Example
- An investment fund manager with $100 million decides on allocations: Property (20%), Equities (50%), Cash (30%).
- The allocation decision is influenced by investors' risk-return profiles and market conditions.
Investment Philosophy
- Passive strategies maintain initial allocations and involve periodic rebalancing.
- Active strategies react to market forecasts to enhance profits through market movements.
Types of Bonds
- Numerous bond types available: Convertible, Callable, Annuity, Asset-backed, Indexed, and Junk bonds (speculative).
- Importance of "investment grade" indicates a bond’s creditworthiness and default risk.
Australian Bond Market
- Composed of government and corporate bonds; government bonds carry low default risk.
- Non-government bonds outstanding total around $1.4 trillion, representing over 50% of ASX market capitalisation ($2.6 trillion as of May 2024).
Cash Management Trusts (CMT) and Bond ETFs
- CMTs allow small investors to pool funds for diversified debt investments, previously requiring large minimum investments.
- Bond ETFs are increasingly popular and accessible for investors.
Equity versus Debt
- Debt obligates firms to regular interest and principal repayments; equity represents a residual claim on cashflows.
- Dividends are paid after debt obligations, leading to an equity risk premium.
Methods of Equity Capital Raising
- Common methods: Initial Public Offerings (IPOs), rights issues, private placements, and dividend reinvestment plans.
- These methods differ in implementation time, cost, and potential effects on existing shareholders.
Selecting Stocks
- Investors can use various methods for stock selection:
- Fundamental analysis
- Technical analysis (charting)
- Random selection (aligns with diversification theory)
- A significant industry revolves around stock selection services, primarily based on fundamental and technical analysis.
Share Price Forecasting Game
- A forecasting game offers bonus marks in the subject for predicting the closing share prices of specific companies.
- Participation is voluntary, and submissions must meet strict deadlines for eligibility in the game.
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Description
Explore the principles of passive management styles in asset allocation. This quiz delves into the empirical findings that indicate the majority of portfolio returns stem from asset allocation rather than individual asset selection. Understand the implications for diversification and strategic asset allocation.
