# Study Session 12: Equity Portfolio Management

## Factor that makes a negative contribution to total portfolio variance

In an example in the Schweser book wherein the question was to calculate the contributions of various factors to total portfolio variance, it was found that:

“Size factor makes a negative contribution to total portfolio variance in this example”

## How to compute a Beta - regression

Dear all,

I asked the question to countless professors and professionals, and no one seems able to confidently prove and explain how a Beta is computed: the question is, should we use Re-Rf and Rm-Rf in our regression and the intercept will be our “Alpha”, or use Re and Rm?

I wrote my master thesis about “The quest for a less imperfect pricing model”, based on the work of Professors Fama and French, which computed its 3- 4- and 5-factor regressions using Re-Rf and Rm-Rf.

## Active risk

Active risk is affected by:

1. cross-correlation: lower correlation between stocks or sectors = more active risk

Why exactly is it like that? Is the correlation considered between the stocks in your portfolio, or between the stocks in your portfolio and the ones in the benchmark?

If the correlation is LOW, they move in opposite directions.. why does this lead to high active risk? Because you need to deviate more, to achieve risk reduction?
2. idiosyncratic risk: low idiosyncratic risk (from DIVERSIFICATION) = low active risk

## Active Share & Active Risk

Good morning everyone,

Yes, I know there are a lot of posts on this thread already, still find it unclear..

Active risk: volatility of the portfolio´s returns, in relation to benchmark (standard deviation of active return)

Active share: difference in weights relative to benchmark

So:

1. Diversification means: low idiosyncratic risk -> low active risk, low active share?

2. Sector rotator: large deviations permitted, so it has a high active risk

## equity recap: rebalancing

Dear Forum,

or should I say dear Herb?

I have two less-than-intelligent questions, probably.

1. Why don’t market-cap and price-cap weightings need rebalancing, while the equal-weighting does?

For equal-weighting, if you choose 10 stocks, they will all be weighted 10%. So, why would you need rebalancing, even when their price changes? You’ll still have 10 stocks (so, looking at the NUMBER, not the price)

2. Why does equal-weighting have a bias towards small-cap?

Thanks a bunch,

C.

## How to calculate VAV indexA?

(this pic come from NOTEs book3 equity, page 198)

my question is:

1:How to calculate VAV indexA? the following process is my method, but the result is different ,what ‘s wrong?

2. (the blue marked ) how to calculate the active risk?

## valuation with cross holdings

Hi all. Can anyone refresh me on how to tackle valuation of a firm with cross holdings. Let us say for example Nissan owns 20% of Renault and Renault owns 20% of Nissan.

This would mean that 80% of the shares of each company are available to be purchased, yet combined they must account for the full value of both firms (else who owns the missing 20% +20%?).

## Equity

Cash has higher active risk because it has a low correlation with the equity benchmark - did not understand this. Can someone pls help?

## reading 25: equity: how AUM, size, liquidity, turnover affect portfolio construction

Hi all,

Regarding the LOS below in Reading 25:

how assets under management, position size, market liquidity, and portfolio turnover affect equity portfolio construction decisions

I understand based on the CFAI textbook that we must consider the implicit costs + slippage costs.

Is there anything else relevant?

[PS:  that chapter is badly structured and/or hard to follow]

Thanks!

## Equity L3 2020 Active equity strategies

Hello all,

Can someone explain the relevance of contemporaneous and forward relationship in equity factor rotation strategy.

Thanks

P