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EQUITY-PORTFOLIO MANAGEMENT
Chapter 19 Questions
What are the two generic equity-portfolio management styles? What are three techniques for constructing a passive index portfolio? What three generic strategies can active equityportfolio managers use? How does the goal of a passive equity-portfolio manager differ from the goal of an active manager?
Chapter 19 Questions
What investment styles may portfolio managers follow? In what ways can investors use information about a portfolio managers style? What skills should a good value portfolio manager possess? A good growth portfolio manager?
Chapter 19 Questions
How can futures and options be useful in managing an equity portfolio? What strategies can be used to manage a taxable investors portfolio in a tax-efficient way?
The choice element of options means that they do not have exact offsetting effects
Positive portfolio price effects remain largely intact, but the cost of insuring against negative moves increases by the option premium
The value is $250 times the index level When the contract expires, delivery is made in cash, not stocks Margin account is marked to market daily
Maintenance margins $2,500 and $1,500
Taxable Portfolios
Outside of tax-exempt accounts such as IRAs, 401(k)s and 403(b)s, taxes represent a large expense to manage. Some implications of taxes:
Portfolio rebalancing to remain on the efficient frontier triggers capital gains, which may offset the benefit of the optimized rebalancing itself Rebalancing for asset allocation purposes likewise results in tax effects
Taxable Portfolios
Active portfolio managers especially need to consider taxes when deciding whether to sell or hold a stock whose value has increased
If a security is sold at a profit, capital gains are paid and less in left in the portfolio to reinvest A new security (the reinvestment security) needs to have a superior return sufficient to make up for these taxes The size of the expected return depends on the expected holding period and the cost basis (and amount of the capital gain) of the original security
Taxable Portfolios
Tax-Efficient Investing Strategies
Will likely become more important to fund managers, as SEC regulations now require mutual funds to disclose after-tax returns
Taxable Portfolios
Possible tax-efficient strategies:
Use options to help convert short-term capital gains into a long-term gain (with more favorable tax treatment) Tax-lot accounting for shares, specifying those with the highest cost basis for sale For some investors, simply focus on growth stocks that will provide long-term gains rather than income