Common stock a security that represents ownership in a

corporation, holders can exercise their voting right to elect

board of directors and corporate policy. In the down side they
are in the bottom of priority in case of liquidation,
bondholders, preferred stocks, other debt holders, common
stocks.
Preferred stock class of shares with a higher claims,
priority, in the assets when liquidation occurs and earnings
(dividends) than common stocks. Those shares have no voting
rights. Usually pay fixed divends during the life of firm.
Convertible bond bonds that can be converted into a
predetermined amount of shares, if company performance is
good. Its like a bond with a stock option in it.
Warrant warrants just like stock options, the holder have
the right to purchase stock from the issuer at a specific price.
But warrants are issued by companies, while option are not
issued by companies.
Senior debt borrowed money that a company must repay
first if it goes out of business, after junior debt, preferred stock
and so on.
Characteristics good benchmark should be consistent
with the portfolio risk/return goals and constraints.
Benchmarks should have a lot big and liquidity securities and
low turnover, it also should be properly weighted, such as
market cap weight, other weighting schemes like priceweighting or equal-weigheting require constant rebalancing
and are not consistent with a passive investment strategy.
Example: Bloomberg European 500 index; MSCI Europe index
Liquidity risk the risk of a securities cannot be sold or
bought quickly to prevent or minimize a loss. Not enough
volume trade for different prices

Interest rate risk the risk that and investment value will
change due to changes in the interest rate (currency) that he
is exposed.
Credit risk the risk of loss of principal because the
borrower failure to repay a loan.
Systematic risk risk inherent to the entire market, it
cannot be mitigated through diversification, only through
hedging.
Specific risk risk very specific to a company, such as
governmental regulation. Business related news that affect
only few companies, while the remaining market is unaffected.
Can be diversified

Dollar-weighted returns its like an Internal Rate of

Return. Returns are weighted by the amount invested in each
stock
Time-weighted returns not weighted by investment
amount, the rate of return is calculated for every period and
them with a geometric mean the average return is calculated.
Each return has equal weighting in the geometric average.
Advantages mutual fund free the investor from many of the
administrative burdens of owning individual securities and
offer professional management. Also offer advantages only
available to large investors such as discounted trading costas,
diversification. But the incur management fee, that reduce the
investor return.
Investment policy money market funds, equity funds,
income funds, growth funds, fixed income funds, asset
allocation fund, index funds, specialized sector funds.

Unit investment units an investment company that offers a

fixed unmanaged portfolio, generally of stocks or bonds, to
investor for a period of time.
Investment in risky investment do not become safer on the
long run
Assets with a lower risk provide lower returns on average than
those of higher risk.
The slope of the capital asset line is the sharp ratio
Mutal fund vs ETF
Performance measure
Capm this models holds ins equilibirium, the market
portfolio is the unique mean-variance efficient tangency
portfolio, thus the passive portfolio strategy is efficient.
Peer group analysis collects returns of several managers
over a period of time and displays them in a box, quartiles.
There is no explicit adjustment for risk each fund takes.
Usually the index are the average.
Treynors measure relation between the rate of return of
a portfolio and the rate of return on the market portfolio Rp =
p + p*(Rm)+p
Tp =

RpRf
p

the higher the better, because it adjustes

returns based on systematic risk. It assumes fully diversified

portfolios, portfolios with the same systematic risk but
different total risk will have the same treynor ratio.
Sharpe measure its like the treynors but uses the total
risk instead of the systematic risk. Sp =

RpRf
. Larger the
p

measure the better, as the portfolio earned a higher excess

return per unit of risk.
If returns dont follow a normal distribution, STD and sharp
ratio are no longer a complete measure of risk, because we
need to consider skewness and kurtosis
Jensens alpha risk adjusted measure of superior
performance, adjusts for the systematic risk of the portfolio.
Positive alpha means the manager is good at selecting stocks
and timing. Rp Rf = o+p(Rm-Rf)+p
Information ratio IRp =

the risk is a nonsystematic

risk, so it could in theory be eliminated by diversification.

IRp=

RpRb
ER

ER = excess return = Rp-Rb

Rb = return benchmark
M^2 measure portfolio is adjusted to mach the volatility
of the market index, in this way the returns of both can be
compares, the adjustment in done by adding T-bills. M^2=RpRm
Performance conclusion, which portfolio is best if A
and B represent the entire portfolio, B is preferable because it
have a high sharp ratio and M^2.
If A and B represent sub-portfolio, B is better because it has a
higher treynor ratio.
For an actively managed portfolio to be mixed with a passive
fund, A is preferred because its information ratio is higher
(because it maximizes returns relative do nonsystematic risk,
and it can be diversified if mixed.)

Portfolio managers value they add value by selecting

superior securities, and superior market timing by allocating
fund to different asset classes.
Asset allocation effect, is done by setting up a benchmark
portfolio and managed portfolio, then we calculate the
differences of the weights invested in market segment from
the benchmark to the portfolio times de returns of each
segment. So when the portfolio is overweighting a segment
with strong returns this is good.
Security selection effect, captures the stock picking
abilities and rewards the portfolio for placing largers weights
on segments that outperformed the market average.
Mutual funds savings instrument that pool the capital of a
group of investors, the money is invested in different assets
such as stocks bonds currencies.
Why to invest in alternatives they help the investor to
enhance portfolio performance by providing uncorrelated
sources of returns. Thanks to UCITS, they regulated those
investments to be available to a much broader audience.
Alternatives can help increase returns while reducing risk, can
limit downside exposure. Examples:
Hedge funds, investment strategies that can short selling
and use leverage to boost and protect returns. Can produce
positive returns when markets are down.
Property, investment in property, mortgage providers etc.
are influenced by interest rates, unemployment and is more
domestically focused.
Commodities, invest directly in commodities, or in
commodity-base companies, derivatives. Are often driven by
different factors than other asset.

Private equity e VC, invest in companies with a unrealized

value, start-ups privately owned companies.
Hedge fund
Mutual fund
Limited liability partnerships
Regulations require public
that provide only minimal
disclosure of strategy and
disclosure of strategy and
portfolio composition.
portfolio composition. Limited Unlimited number of investors
number of investor
Very flexible investment
Predictable investment
strategy, can act
strategy, limited use of
opportunistically and make a
shorting, leverage, option.
wide range of investments,
Redemption can happen
often use shortin, leverage,
frequently.
option. They have lock-up
period, require advance
redemption notices.
Charge 1-2% management
Fixed fee of .5 to 1.5%
fee and 20% of profits
Hedge fund strategies. Directional bet that one sector
will outperform others.
Hedge fund strategies non-directional exploit
misalignment in relative valuations across sector. Strives to be
market neutral.
Hedge fund styles:
Convertible arbitrage

Short bias
Emerging markets
Equity market neutral

Invest in convertible
securities, long in convertible,
short stocks
Net short positions in equities
Exploit market inefficiencies
Equal weight Long/short
hedges, to be market neutral
and exploint enefficiencies.
Involves leverage

Event driven

Fund of funds
Equity long short

Attempt to profit from

mergers, acquisitions,
bankruptcy etc
Allocates cash to several
other funds
Long in securities
undervalued, short
overvalued securities. Reduce
risk compared to overall
market. Bias to long

Portable alpha invest wherever you can find alpha, hedge

systematic risk to isolate alpha, invest in the desired sector in
a index fund, transfer alpha from that market
Black swans many hedge funds rack up fame through
strategies that make money most of the time, but expose
investors to rare but extreme losses
High water mark the fee structure can give incentives to
shut downs a poorly performing fund.
Derivatives payoff depend on the performance of the
underlying asset.
Challenges for portfolio managers set up an
investment process, risk and return, efficient markets
Price weighted each component makes up a fraction of
the index that is proportional to its price
Equal weighted all components are given the same weight
in the index, as if the investor holds an equal amount invested
in each stock.
Market cap weighted index components are weighted
according to the total market value of their outstanding shares

Free-float adjusted adjusted for the amount of stock that

is available to the public.
Price indices measure the price performance without
including dividends
Total return indices track the performance assuming that
dividends are reinvested
Benchmarks:
Msci Europe
Msci usa
Msci emerging market
Fte global developed real estate index
S&p goldman sachs commodity index
Tass fund of funds
Suitability test is a pool of question done to the client to
analyze his investment profile.
Different books in the fund example:
Defensive book driven by bond yields, less volatile
Cyclical book driven by emerging markets
Financials book driven by central banks
Investment process:
Asset allocation equity, fixed income or bond, alternatives
like property commodities and derivatives, and cash ( really
short-term debt, low risk)

Sub asset class large-mid-small cap, value companies,

growth, income, long-shor term bonds, global bonds,
corporate bonds
Investment style growth, value, blend
Passive management the aim is to track accurately the
performance of the market/index, relative return.
Securitization combination of some financial instruments in
one big pool, then divide them in small pieces to enable the
small investor to purchase shares of this large pool
Stop loss if price goes below a defined price the position
will be closed
Limit order if price reach a specific price, purchase order
will be given
Market order order will be taken at spot price