Upload
godfrey-newton
View
219
Download
1
Tags:
Embed Size (px)
Citation preview
Goal: Earn a portfolio return net of
transaction costs and expenses that exceeds the return of a passive benchmark portfolio (most often an index) on a risk-adjusted basis.
2
1. Costs & Fees
Transaction Costs and fees range from 1% - 2% of assets under management on average. (hurdle)
3
2. Appropriate Evaluation of Performance Difficulty differentiating Luck from Skill
Appropriate Risk-Adjustment Model? (CAPM vs Fama-French Factor Model vs Other Models)
4
Asset AllocationStocks, Bonds, Money Market
Sector AllocationOverweighting and underweighting based
on industry, size, or value vs. growthIndividual Stock Selection
5
Test to see if trading rules would have worked using historical data.
Subject to data mining criticisms as you can always find some patterns. It does not mean that they will persist in the future.
6
Quadratic Programming: Efficient frontier optimization in Mean/Variance Space based on Expected Returns, Standard Deviations, and Correlations
7
Logic: Market is fairly efficient. Too difficult to overcome 1 - 2% costs of running an active equity portfolio.
Don’t try to beat the market, just equal it and keep expenses to a bare minimum.
8
Portfolio is built without using technical or fundamental analysis.
Buy & Hold: The securities are purchased and then held with only occasional re-balancing (reinvest dividends, a change in the index etc..)
9
Passive portfolios that track an index and sell shares to investors are called Index Funds.
(Ex: Vanguard 500 Index which tracks the S&P 500.)
10
Manager Performance: Judged by how well he/she tracks the index and by the costs generated to do so.
11
2. Sampling: Buy the stocks with larger index weights & hold a representative sample of the others.
Benefit Relative Full Replication: Lower commissions (less stocks to purchase and to reinvest dividends).
Drawback Relative Full Replication: Will be Tracking Error
13
1. R-Squared: Measures how closely the fund is moving with the benchmark index.
This measures tracking, but not
costs!
14
An alternative to buying shares in an Index Fund.
Depositary receipts with underlying stocks in an index held in deposit by the financial institution that issued certificates.
Shares are traded like a stock but represent a claim on the portfolio.
15