Unit 4 – Equity Portfolio Management

Key Learning Objectives

To manage a portfolio of equity securities, taking into account theories of returns and risk, and allowing for risk controls

Understand and exploit market inefficiencies and mispricing

4.1 Understanding pricing differences

4.1.1 Competitive positioning

4.1.2 Franchise Value

4.1.3 Real options

Understanding the P/E ratios and formulae

4.1.4 Why adopt a structure approach than informal approach

Positive characteristics of a company does not imply better returns because they might have already being reflected in the price

4.1.5 Behavioural Finance

4.1.6 Market Anomalies

4.2 Multi-Factor Models

Learning objective Identify characteristics of individual equity investment that are relevant to portfolio construction To perform risk and return modelling for equities

4.2.2 Factors

Factors in the chapter can refer to many things such as industry or sector factors, alpha factor or other common risk factors

In seeking to explain risk, a risk model should contain factors that are highly volatile. Market cap is usually a factor because return to market cap is often very volatile.

In alpha research, multi factor should be used so that that return attribute to a factor is not distorted by the influence of another factor which was not included

4.2.3 Multi-factor Risk and return