Unit 7: Active Portfolio Management Considerations

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Questions and Answers

What is a key advantage of active portfolio managers controlling their transactions?

They can adopt defensive strategies to protect the portfolio from market downturns

What is a potential risk of active portfolio managers selecting securities?

They may miss an investment opportunity

Why do actively managed funds typically have higher management expense ratios than passively managed funds?

Because there is a cost to the portfolio manager performing research and analysis

What is the primary focus of the top-down approach in active portfolio management?

Analyzing the overall economy and market trends Signup and view all the answers

What is a potential advantage of active portfolio management when compared to passive management?

The ability to seize new investment opportunities Signup and view all the answers

What is a potential disadvantage of active portfolio management when compared to passive management?

The increased amount of trading and associated transaction costs Signup and view all the answers

Why might some investors accept higher management expense ratios in actively managed funds?

Because they believe the potential for higher returns justifies the additional costs Signup and view all the answers

What is a common approach used by active portfolio managers to select securities for their mutual funds?

Either a top-down or bottom-up approach Signup and view all the answers

Which type of investor is willing to pay a higher price for securities with growth potential?

Growth managers Signup and view all the answers

What do value managers believe the market is unaware of?

A company's true value Signup and view all the answers

What type of investing combines the principles of growth and value investing?

Growth at a Reasonable Price (GARP) investing Signup and view all the answers

What do GARP managers seek in investments?

Potential for continued growth in the future Signup and view all the answers

What is the primary goal of value managers?

To profit when the share price corrects Signup and view all the answers

What is the characteristic of securities sought by growth managers?

Companies with growth potential Signup and view all the answers

Why do value managers believe the share price is beaten down?

Due to sector or company bad news Signup and view all the answers

What is the primary difference between GARP and value managers?

GARP managers seek reasonable prices, while value managers seek bargain prices Signup and view all the answers

What is the characteristic of portfolios that are below the frontier?

They offer a lower return for the same level of risk Signup and view all the answers

What is the primary purpose of financial analysis in portfolio management?

To assess the value and potential future performance of companies and their securities Signup and view all the answers

What is the duration of Lesson 2: Financial Analysis in the Canadian Investment Funds Course?

15 minutes Signup and view all the answers

What is the purpose of publishing audited financial statements by companies that make their securities available to the public?

To comply with the regulatory requirements Signup and view all the answers

Which of the following financial statements is used to analyze the cash inflows and outflows of a company?

Cash Flow Statement Signup and view all the answers

What type of ratio is used to assess the ability of a company to pay its short-term debts?

Liquidity Signup and view all the answers

What is the primary goal of a portfolio manager when selecting investments for a mutual fund portfolio?

To assess the value of securities Signup and view all the answers

What is the primary advantage of using financial analysis ratios in portfolio management?

To assess the value of securities Signup and view all the answers

What is the primary function of a company's liquidity ratios?

To determine the company's ability to meet current financial obligations Signup and view all the answers

What is the implication of a higher debt-equity ratio?

The company has too much debt and may struggle to make interest payments Signup and view all the answers

What is the formula for calculating the gross profit margin?

(Revenue – cost of goods sold) ÷ revenue Signup and view all the answers

What is the primary purpose of valuation ratios?

To determine the investment value of a security Signup and view all the answers

What is the implication of a higher current ratio?

The company has a greater ability to pay its short-term debt Signup and view all the answers

What is the formula for calculating the debt-equity ratio?

Total outstanding debt ÷ shareholders' equity Signup and view all the answers

What is the primary function of debt-equity ratios?

To gauge a company's reliance on debt Signup and view all the answers

What is the most well-known valuation ratio?

Price-to-earnings ratio Signup and view all the answers

What is the minimum value of 'n' in the total return formula for non-money market mutual funds?

1 Signup and view all the answers

What does the 'initial value' represent in the total return formula for non-money market mutual funds?

The beginning net asset value of one unit or share of a mutual fund Signup and view all the answers

What is the purpose of the total return formula for non-money market mutual funds?

To calculate the standard return for non-money market mutual funds, including reinvestment and compounding of distributions Signup and view all the answers

What is the unit of measurement for 'n' in the total return formula for non-money market mutual funds?

Years Signup and view all the answers

What is the formula used to calculate the current yield of a money market mutual fund?

[($9,595 ÷ $10,000,000) x 365 ÷ 7] x 100 Signup and view all the answers

What is the time period used to calculate the current yield of a money market mutual fund?

7 days Signup and view all the answers

What is the purpose of the current yield formula for money market mutual funds?

To calculate the income earned on a money market fund for the most recent 7 days Signup and view all the answers

What is the redeemable value in the total return formula for non-money market mutual funds?

The end net asset value of one unit or share of a mutual fund, incorporating all distributions Signup and view all the answers

Study Notes

Active Portfolio Management Considerations

Active portfolio managers select securities in a mutual fund, which allows for flexibility in seizing new investment opportunities and realizing profits at favourable times, but also risks selecting poorly performing securities.
They can adopt defensive strategies to protect the portfolio from market downturns, but may incur higher transaction costs and management expense ratios (MERs) compared to passively managed funds.
If the fund outperforms its benchmark, the costs may be acceptable in exchange for higher returns.

Active Management Approaches

Top-down approach: starts with analyzing the overall economy and market trends to determine which industries, markets, and/or countries are expected to perform well.
Bottom-up approach: focuses on individual securities and their potential for growth or value.

Growth and Value Investing

Growth investing: focuses on securities with growth potential, often represented by growing or expanding companies.
Value investing: looks for securities of good-quality companies that are undervalued, with the goal of buying at a low price and selling at a higher price when the market corrects.

Growth at a Reasonable Price (GARP)

Combines the principles of growth and value investing, seeking investments with a consistent above-average earnings record and potential for continued growth.
GARP managers purchase growth investments at prices lower than their industry peers, but not at bargain prices.

Financial Analysis

Enables portfolio managers to gauge the past and current performance of companies and assess their value and potential future performance.
Financial statements used include:
- Balance Sheet
- Income Statement
- Cash Flow Statement
- Statement of Retained Earnings
Financial analysis ratios used include:
- Profitability
- Liquidity
- Debt-equity
- Valuation

Financial Statements

Companies that make their securities available to the public are required to publish audited financial statements on an annual basis.
Financial statements provide information on a company's financial health, performance, and position.

Financial Ratios

Gross Profit Margin: shows the percentage of revenue left over after a company pays for the cost of goods sold.
Current Ratio: shows a company's ability to pay its short-term debt.
Debt-Equity Ratio: gauges how heavily a company relies on borrowed money to conduct its business.
Price-to-Earnings (P/E) Ratio: assesses the investment value of a security in comparison to its share price.

Calculating Mutual Fund Returns

Non-money Market Mutual Funds: total return is calculated using the formula: [($redeemable value ÷ $initial value)^(1/n) -1] x 100.
Money Market Mutual Funds: total return is calculated using two different formulas: current yield and effective yield.
Current Yield: reflects the income earned on a money market fund for the most recent seven days, expressed as a simple annualized percentage.

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