The Theory of Active Portfolio Management

Slides:

Advertisements

Similar presentations

Performance Evaluation and Active Portfolio Management

Advertisements

Efficient Diversification

Performance Evaluation and Active Portfolio Management

 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill 24-1 Portfolio Performance Evaluation.

5.5Asset Allocation Across Risky and Risk Free Portfolios 5-1.

Performance Evaluation and Active Portfolio Management

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Portfolio Performance Evaluation 18 Bodie, Kane, and Marcus.

Stern School of Business

Chapter 9 Capital Market Theory.

1 Fin 2802, Spring 10 - Tang Chapter 24: Performance Evaluation Fin2802: Investments Spring, 2010 Dragon Tang Lectures 21&22 Performance Evaluation April.

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved The Theory of Active Portfolio Management Chapter 27.

 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill 28-1 The Theory of Active Portfolio Management.

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Efficient Diversification CHAPTER 6.

Portfolio Evaluation Outline Investment return measurement conventional measurement theory Evaluation with changing portfolio composition Evaluation with.

Evaluation of portfolio performance

1 Finance School of Management Chapter 13: The Capital Asset Pricing Model Objective The Theory of the CAPM Use of CAPM in benchmarking Using CAPM to determine.

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 The Capital Asset Pricing Model.

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 24 Portfolio Performance Evaluation.

Risk Premiums and Risk Aversion

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 21-1 Chapter 21.

The Capital Asset Pricing Model (CAPM)

Chapter 13 CAPM and APT Investments

Chapter #4All Rights Reserved1 Chapter 4 Evaluating Portfolio Performance.

Portfolio Performance Evaluation

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 7 Capital Allocation Between The Risky And The Risk-Free.

The Portfolio Management Process 1. Policy statement –specifies investment goals and acceptable risk levels –should be reviewed periodically –guides all.

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Efficient Diversification CHAPTER 6.

Efficient Diversification CHAPTER 6. Diversification and Portfolio Risk Market risk –Systematic or Nondiversifiable Firm-specific risk –Diversifiable.

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Performance Evaluation and Active Portfolio Management CHAPTER 18.

Return and Risk The Capital Asset Pricing Model (CAPM)

Security Analysis and Portfolio Management Power Points by Aditi Rode.

“Differential Information and Performance Measurement Using a Security Market Line” by Philip H. Dybvig and Stephen A. Ross Presented by Jane Zhao.

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 24-1 Portfolio Performance Evaluation.

Chapter 6 Efficient Diversification. E(r p ) = W 1 r 1 + W 2 r 2 W 1 = W 2 = = Two-Security Portfolio Return E(r p ) = 0.6(9.28%) + 0.4(11.97%) = 10.36%

McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Performance Evaluation and Active Portfolio Management CHAPTER 17.

Performance Evaluation. Introduction Complicated subject Theoretically correct measures are difficult to construct Different statistics or measures are.

Chapter 18 Portfolio Performance Evaluation. Types of management revisited Passive management 1.Capital allocation between cash and the risky portfolio.

 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill 24-1 Portfolio Performance Evaluation Chapter.

1 MBF 2263 Portfolio Management & Security Analysis Lecture 4 Efficient Frontier & Asset Allocation.

Chapter 6 Efficient Diversification Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.

Chapter 6 Efficient Diversification. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. r p = W 1 r 1 + W 2 r 2 W 1 = Proportion.

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 20-1 Chapter 20.

FIN437 Vicentiu Covrig 1 Portfolio management Optimum asset allocation Optimum asset allocation (see chapter 8 RN)

Investments, 8 th edition Bodie, Kane and Marcus Slides by Susan Hine McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights.

Chapter 7 Risk and Portfolio Theory. Expected Return E( r ) = E ( D ) +g P.

INVESTMENTS | BODIE, KANE, MARCUS Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written.

Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 1 Chapter 19.

EQUITY-PORTFOLIO MANAGEMENT

Capital Allocation to Risky Assets

Efficient Diversification

Portfolio Performance Evaluation

Capital Market Theory: An Overview

Key Concepts and Skills

Return and Risk The Capital Asset Pricing Model (CAPM)

The Theory of Active Portfolio Management

Portfolio Performance Evaluation

Efficient Diversification

CHAPTER 8 Index Models Investments Cover image Slides by

Portfolio Performance Evaluation

Portfolio Performance Evaluation

TOPIC 3.1 CAPITAL MARKET THEORY

Investments: Analysis and Management

Chapter 4: Portfolio Management Performance

Portfolio Optimization- Chapter 7

The Theory of Active Portfolio Management

Optimal Risky Portfolios

2. Building efficient portfolios

International Portfolio Theory and Diversification

Capital Asset Pricing Model

Presentation transcript:

The Theory of Active Portfolio Management Chapter 27

Lure of Active Management Are markets totally efficient? Some managers outperform the market for extended periods. While the abnormal performance may not be too large, it is too large to be attributed solely to noise. Evidence of anomalies such as the turn of the year exist. The evidence suggests that there is some role for active management.

Market Timing Adjust the portfolio for movements in the market. Shift between stocks and money market instruments or bonds. Results: higher returns, lower risk (downside is eliminated). With perfect ability to forecast behaves like an option.

Return of a Perfect Market Timer rM rf

Returns from 1990 - 1999 Year Lg Stocks T-Bills 1990 -3.20 7.86 1991 30.66 5.65 1992 7.71 3.54 1993 9.87 2.97 1994 1.29 3.91 1995 37.71 5.58 1996 23.07 1998 28.58 5.11 1999 21.04 4.80

With Perfect Forecasting Ability Switch to bills in 1990 and 1994 Mean =18.94% Standard Deviation = 12.04% Invested in large stocks for the entire period Mean =17.41% Standard Deviation =14.11% The results are clearly related to the period

With Imperfect Ability to Forecast Long horizon to judge the ability Judge proportions of correct calls Bull markets and bear market calls

Superior Selection Ability Concentrate funds in undervalued stocks or undervalued sectors or industries. Balance funds in an active portfolio and in a passive portfolio. Active selection will mean some unsystematic risk.

Treynor-Black Model Model used to combine actively managed stocks with a passively managed portfolio. Using a reward-to-risk measure that is similar to the the Sharpe Measure, the optimal combination of active and passive portfolios can be determined.

Treynor-Black Model: Assumptions Analysts will have a limited ability to find a select number of undervalued securities. Portfolio managers can estimate the expected return and risk, and the abnormal performance for the actively-managed portfolio. Portfolio managers can estimate the expected risk and return parameters for a broad market (passively managed) portfolio.

Reward to Variability Measures Passive Portfolio :

Reward to Variability Measures Appraisal Ratio:

Reward to Variability Measures Combined Portfolio :

Treynor-Black Allocation CAL E(r) CML P A M Rf 

Summary Points: Treynor-Black Model Sharpe Measure will increase with added ability to pick stocks. Slope of CAL>CML (rp-rf)/p > (rm-rf)/p P is the portfolio that combines the passively managed portfolio with the actively managed portfolio. The combined efficient frontier has a higher return for the same level of risk.