Equity Investmets

Key Concepts

• Passive vs Active Investing
• Indexing
• Implementation of Passive Strategies
• Active Investing Styles
• Methods to Identify Style
• Long -Short Equity Strategies
• Equity Alpha Investing

Passive investing can be two forms:

• Buy and hold (portfolio never changes)
• Indexing (portfolio changes according to formula) \n\n\n

Active investing involves selection of assets according to manager's style and asset positions can change at any time according to manager's discretion

Passive investing can be two forms:

• Buy and hold (portfolio never changes)
• Indexing (portfolio changes according to formula) \n\n\n

Active investing involves selection of assets according to manager's style and asset positions can change at any time according to manager's discretion

• Cap Weight: use stock market cap weights
• Average Prices
• Float Weight

• Cap Weight: biased to largest stock
• Average Prices: bias towards higher prices

Important to understand bias vs goal

• Index Funds
• Index ETF's
• Index Replication

• Liquid Stocks: Easy
• Low liquidity stock: difficult
• Large index: difficult

For difficult to replicate indexing we use a factor model to find a subset of securities that closely replicate the index with acceptable tracking error

• Value - Low P/E
• Growth - price or earnings momentum
• Large/Mid/Small Cap

• Compare holdings in fund with known benchmark assets
• Regress fund returns vs returns of known style index

• Relative value: stat arb
• Merger Arbitrage

\[ R_{i,t} = \alpha_{i} + \beta_{i}R_{m,t} + \varepsilon_{i,t} \]

New Asset is we short beta amount of index future: \[ \alpha_{i}= R_{i,t} - \beta_{i}R_{m,t} - \varepsilon_{i,t} \]

\( \alpha \) is zero correlation with \( R_{m,t} \) => helps reduce heavy equity market risk exposure