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Asset Management

Asset Management. Lecture 22. Review class. Asset management process. Risk aversion. Planning with the client Investor objectives, constraints and preferences Execution by the asset manager: Asset allocation Risk and return, effects of diversification (views on inflation, growth, etc.)

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Asset Management

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  1. Asset Management Lecture 22

  2. Review class

  3. Asset management process Risk aversion • Planning with the client • Investor objectives, constraints and preferences • Execution by the asset manager: • Asset allocation • Risk and return, effects of diversification (views on inflation, growth, etc.) • Security selection • Market efficiency: can we beat the market? (private info) • Execution • How and when do you trade? (trading speed, trading costs) • Evaluation: • What are the risk and the return of the portfolio? • Does the manager underperform or outperform? Markovic model, Single index model, Structural multifactor model Black-litterman model Portfolio evaluation, Performance attribution

  4. Risk Aversion and utility values • Risk aversion • Utility value • Calculate certainty equivalent rate • Estimating risk aversion

  5. Markowitz portfolio selection model • Sharpe Ratio

  6. Single-Index Model

  7. Optimal Risky Portfolio of the Single-Index Model

  8. Optimal Risky Portfolio of the Single-Index Model • Maximize the Sharpe ratio • Expected return, SD, and Sharpe ratio:

  9. Optimizing procedure

  10. The Black-Litterman Model Step 1: Estimate the covariance matrix from historical data Step 2: Determine a baseline forecast Step 3: Integrating the manager’s private views Step 4: Developing revised (posterior) expectations Step 5: Apply portfolio optimization

  11. The Black-Litterman Model Step 3: Integrating the manager’s private views Step 4: Developing revised (posterior) expectations BL Updating formulas

  12. Structural multifactor model and factor choice • Tracking portfolio • Beta adjustment • Alpha precision adjustment • Style analysis

  13. Tracking error • Portfolios are often compared against a benchmark • Tracking error • Benchmark Risk: SD of Tracking error

  14. Risk Adjusted Performance ap / s(ep)

  15. Calculate the return on the ‘Bogey’ and on the managed portfolio Explain the difference in return based on component weights or selection Summarize the performance differences into appropriate categories Performance Attribution

  16. Formula for Attribution Total contribution from asset class i Contribution from asset allocation Contribution from security selection

  17. Formula for International Attribution Total contribution Contribution from country allocation Contribution from stock selection Contribution from currency selection

  18. Foreign exchange rate risk • Country risk • Home bias • Hedge funds, strategies, and performance evaluation • Alpha transfer

  19. Behavioral finance: limits to arbitrage and investor irrationality • Technical analysis

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