Investment analysis and portfolio management quantitative methods of investme...Arif Hossain FCA
The objective of investment analysis and portfolio management study is to help entrepreneurs and practitioners to understand the investments field as it is currently understood and practiced for sound investment decisions making. Following this objective, key concepts are presented to provide an appreciation of the theory and practice of investments, focusing on investment portfolio formation and management issues. This study is designed to emphasize both theoretical and analytical aspects of investment decisions and deals with modern investment theoretical concepts and instruments. Both descriptive and quantitative materials on.............................
investment decisions, risk and uncertainity, types of risk, techniques of measuring risk, cost of capital, importance, factors affecting cost of capital, computation of cost of capital, capital structure, capital structure theories, dividend theories, walter model, gordon model, mm model, working capital management, types of working capital, factors influencing working capital, preparation of cash budget, problems on working capital, corporate valuation,methods
Investment analysis and portfolio management quantitative methods of investme...Arif Hossain FCA
The objective of investment analysis and portfolio management study is to help entrepreneurs and practitioners to understand the investments field as it is currently understood and practiced for sound investment decisions making. Following this objective, key concepts are presented to provide an appreciation of the theory and practice of investments, focusing on investment portfolio formation and management issues. This study is designed to emphasize both theoretical and analytical aspects of investment decisions and deals with modern investment theoretical concepts and instruments. Both descriptive and quantitative materials on.............................
investment decisions, risk and uncertainity, types of risk, techniques of measuring risk, cost of capital, importance, factors affecting cost of capital, computation of cost of capital, capital structure, capital structure theories, dividend theories, walter model, gordon model, mm model, working capital management, types of working capital, factors influencing working capital, preparation of cash budget, problems on working capital, corporate valuation,methods
In this paper we propose a new risk management framework that can evaluate the cost-risk tradeoff of alternative risk management strategies. Although there is ample theoretical support for risk management as an activity, common risk management approaches suffer serious problems:
Minimize Risk: Completely eliminating risk is expensive and impractical
Efficient Frontier: Can eliminate many poor risk management strategies but rarely gives a definitive optimal
strategy
Sharpe Ratio: Provides a cost-risk trade-off but the price of one unit of risk is arbitrary
Based on a recent empirical study, we propose a new cost-risk measure which directly values the impact of earnings per share and cash flow per share volatility.
This new approach will enable corporate CFOs and treasurers to make more robust risk management decisions and, critically, better defend those decisions internally and to the broader market.
The Secrets to Long Term Investing Success - Session 1Bob Sloma
Learn the secrets to long-term investing success! In this seminar series Bob Sloma, MBA, Principal of Sigma Advantage, shares the investing process he developed in the mid-nineties to manage his own and his wife’s retirement investments. His process has consistently beaten the S&P 500 return on a three, five and ten year basis, making changes only once a year, with between two-thirds and three-quarters of the market’s risk!
Real Options, Investment Analysis and Process PANKAJ PANDEY
Understand the capital budgeting process:
Document the policies and practices of companies in India and compare them with that of the companies in developed countries.
Understand the linkage between corporate strategy and investment decisions.
Define strategic real options.
Show the valuation of real options.
Investment portfolio optimization with garch modelsEvans Tee
Since the introduction of the Markowitz mean-variance optimization model, several extensions have been made to improve optimality. This study examines the application of two models - the ARMA-GARCH model and the ARMA- DCC GARCH model - for the Mean-VaR optimization of funds managed by HFC Investment Limited. Weekly prices of the above mentioned funds from 2009 to 2012 were examined. The funds analyzed were the Equity Trust Fund, the Future Plan Fund and the Unit Trust Fund. The returns of the funds are modelled with the Autoregressive Moving Average (ARMA) whiles volatility was modelled with the univariate Generalized Autoregressive Conditional Heteroskedasti city (GARCH) as well as the multivariate Dynamic Conditional Correlation GARCH (DCC GARCH). This was based on the assumption of non-constant mean and volatility of fund returns. In this study the risk of a portfolio is measured using the value-at-risk. A single constrained Mean-VaR optimization problem was obtained based on the assumption that investors’ preference is solely based on risk and return. The optimization process was performed using the Lagrange Multiplier approach and the solution was obtained by the Kuhn-Tucker theorems. Conclusions which were drawn based on the results pointed to the fact that a more efficient portfolio is obtained when the value-at-risk (VaR) is modelled with a multivariate GARCH.
If this book were a fairy tale, perhaps it would have a happier en.docxwilcockiris
If this book were a fairy tale, perhaps it would have a happier ending. The unfortunate fact is that the individual investor has few, if any, attractive investment alternatives. Investing, it should be clear by now, is a full-time job. Given the vast amount of information available for review and analysis and the complexity of the investment task, a part-time or sporadic effort by an individual investor has little chance of achieving long-term success. It is not necessary, or even desirable, to be a professional investor, but a significant, ongoing commitment of time is a prerequisite. Individuals who cannot devote substantial time to their own investment activities have three alternatives: mutual funds, discretionary stockbrokers, or money managers.
Mutual Funds
Mutual funds are, in theory, an attractive alternative for the individual investor, combining professional management, low transaction costs, immediate liquidity, and reasonable diversification. In practice, they mostly do a mediocre job of managing money. There are, however, a few exceptions to this rule.
For one thing, investors should certainly prefer no-load over load funds; the latter charge a sizable up-front fee, which is used to pay commissions to salespeople. Unlike closed-end funds, which have a fixed number of shares that fluctuate in price according to supply and demand, open-end funds issue new shares and redeem shares in response to investor interest. The share price of open-end funds is always equal to net asset value, which is based on the current market prices of the underlying holdings. Because of the redemption feature that ensures both liquidity and the ability to realize current net asset value, open-end funds are generally more attractive for investors than closed-end funds.1
Unfortunately for their shareholders, because open-end mutual funds attract and lose assets in accordance with recent results, many fund managers are participants in the short-term relative-performance derby. Like other institutional investors, mutual fund organizations profit from management fees charged as a percentage of the assets under management; their fees are not based directly on results. Consequently, the fear of asset outflows resulting from poor relative performance generates considerable pressure to go along with the investment crowd.
Another problem is that open-end mutual funds have in recent years attracted (and even encouraged) "hot" money from speculators looking to earn quick profits without the risk or bother of direct stock ownership. Many highly specialized mutual funds (e.g., biotechnology, environmental, Third World)
have been established in order to exploit investors' interests in the latest market fad. Mutual-fund-marketing organizations have gone out of their way to encourage and even incite investor enthusiasm, setting up retail mutual fund stores, providing hourly fund pricing, and authorizing switching among their funds by telephone. They do not discourage the .
In this paper we propose a new risk management framework that can evaluate the cost-risk tradeoff of alternative risk management strategies. Although there is ample theoretical support for risk management as an activity, common risk management approaches suffer serious problems:
Minimize Risk: Completely eliminating risk is expensive and impractical
Efficient Frontier: Can eliminate many poor risk management strategies but rarely gives a definitive optimal
strategy
Sharpe Ratio: Provides a cost-risk trade-off but the price of one unit of risk is arbitrary
Based on a recent empirical study, we propose a new cost-risk measure which directly values the impact of earnings per share and cash flow per share volatility.
This new approach will enable corporate CFOs and treasurers to make more robust risk management decisions and, critically, better defend those decisions internally and to the broader market.
The Secrets to Long Term Investing Success - Session 1Bob Sloma
Learn the secrets to long-term investing success! In this seminar series Bob Sloma, MBA, Principal of Sigma Advantage, shares the investing process he developed in the mid-nineties to manage his own and his wife’s retirement investments. His process has consistently beaten the S&P 500 return on a three, five and ten year basis, making changes only once a year, with between two-thirds and three-quarters of the market’s risk!
Real Options, Investment Analysis and Process PANKAJ PANDEY
Understand the capital budgeting process:
Document the policies and practices of companies in India and compare them with that of the companies in developed countries.
Understand the linkage between corporate strategy and investment decisions.
Define strategic real options.
Show the valuation of real options.
Investment portfolio optimization with garch modelsEvans Tee
Since the introduction of the Markowitz mean-variance optimization model, several extensions have been made to improve optimality. This study examines the application of two models - the ARMA-GARCH model and the ARMA- DCC GARCH model - for the Mean-VaR optimization of funds managed by HFC Investment Limited. Weekly prices of the above mentioned funds from 2009 to 2012 were examined. The funds analyzed were the Equity Trust Fund, the Future Plan Fund and the Unit Trust Fund. The returns of the funds are modelled with the Autoregressive Moving Average (ARMA) whiles volatility was modelled with the univariate Generalized Autoregressive Conditional Heteroskedasti city (GARCH) as well as the multivariate Dynamic Conditional Correlation GARCH (DCC GARCH). This was based on the assumption of non-constant mean and volatility of fund returns. In this study the risk of a portfolio is measured using the value-at-risk. A single constrained Mean-VaR optimization problem was obtained based on the assumption that investors’ preference is solely based on risk and return. The optimization process was performed using the Lagrange Multiplier approach and the solution was obtained by the Kuhn-Tucker theorems. Conclusions which were drawn based on the results pointed to the fact that a more efficient portfolio is obtained when the value-at-risk (VaR) is modelled with a multivariate GARCH.
If this book were a fairy tale, perhaps it would have a happier en.docxwilcockiris
If this book were a fairy tale, perhaps it would have a happier ending. The unfortunate fact is that the individual investor has few, if any, attractive investment alternatives. Investing, it should be clear by now, is a full-time job. Given the vast amount of information available for review and analysis and the complexity of the investment task, a part-time or sporadic effort by an individual investor has little chance of achieving long-term success. It is not necessary, or even desirable, to be a professional investor, but a significant, ongoing commitment of time is a prerequisite. Individuals who cannot devote substantial time to their own investment activities have three alternatives: mutual funds, discretionary stockbrokers, or money managers.
Mutual Funds
Mutual funds are, in theory, an attractive alternative for the individual investor, combining professional management, low transaction costs, immediate liquidity, and reasonable diversification. In practice, they mostly do a mediocre job of managing money. There are, however, a few exceptions to this rule.
For one thing, investors should certainly prefer no-load over load funds; the latter charge a sizable up-front fee, which is used to pay commissions to salespeople. Unlike closed-end funds, which have a fixed number of shares that fluctuate in price according to supply and demand, open-end funds issue new shares and redeem shares in response to investor interest. The share price of open-end funds is always equal to net asset value, which is based on the current market prices of the underlying holdings. Because of the redemption feature that ensures both liquidity and the ability to realize current net asset value, open-end funds are generally more attractive for investors than closed-end funds.1
Unfortunately for their shareholders, because open-end mutual funds attract and lose assets in accordance with recent results, many fund managers are participants in the short-term relative-performance derby. Like other institutional investors, mutual fund organizations profit from management fees charged as a percentage of the assets under management; their fees are not based directly on results. Consequently, the fear of asset outflows resulting from poor relative performance generates considerable pressure to go along with the investment crowd.
Another problem is that open-end mutual funds have in recent years attracted (and even encouraged) "hot" money from speculators looking to earn quick profits without the risk or bother of direct stock ownership. Many highly specialized mutual funds (e.g., biotechnology, environmental, Third World)
have been established in order to exploit investors' interests in the latest market fad. Mutual-fund-marketing organizations have gone out of their way to encourage and even incite investor enthusiasm, setting up retail mutual fund stores, providing hourly fund pricing, and authorizing switching among their funds by telephone. They do not discourage the .
In our last post we discussed how the leaders in the industry are changing the way they invest and manage their investments.
In this post we explore how the metrics to measure success is changing and how it is going to impact the way port executives are appraised and maybe one day how they are remunerated.
For more information please go to: port-investor.com or write us on info@industreams.com.
C-level Innovation as Collaborative Business TransformationMalcolm Ryder
Executive adoption of innovations is an outcome of forming and pursuing a group ambition, but the group must be executives themselves, and it could also take a group of innovations to get any of them adopted.
Mercer Capital's Bank Watch | June 2021 | Community Bank Valuation Financial ...Mercer Capital
Brought to you by the Financial Institutions Team of Mercer Capital, this monthly newsletter is focused on bank activity in five U.S. regions. Bank Watch highlights various banking metrics, including public market indicators, M&A market indicators, and key indices of the top financial institutions, providing insight into financial institution valuation issues.
Undertaking a valuation of a private company can be a confusing exercise for that company's founders, directors & shareholders.
In this short whitepaper experienced investment banker Nicholas Assef highlights a number of the areas of business operation that need to be considered in the valuation exercise. In each valuation engagement the nature of "heads" for consideration will be different.
Importantly the reader should take 2 standout points from this whitepaper. Growth & certainty of cashflows. A company's valuation is a reflection of many things - but in particular the probability and certainty that future growth and performance will be delivered.
Mercer Capital | Valuation Insight | Corporate Finance in 30 Minutes Mercer Capital
Corporate finance does not need to be a mystery.
In this whitepaper, we have distilled the fundamental principles of corporate finance into an accessible and non-technical primer. Structured around the three key decisions of capital structure, capital budgeting, and dividend policy, the guide is designed to assist directors and shareholders without a finance background to make relevant and meaningful contributions to the most consequential financial decisions all companies must make. Our goal with this whitepaper is to give directors and shareholders a vocabulary and conceptual framework for thinking about strategic corporate finance decisions, allowing them to bring their perspectives and expertise to the discussion.
Similar to Decentralized investment management (20)
how to sell pi coins in all Africa Countries.DOT TECH
Yes. You can sell your pi network for other cryptocurrencies like Bitcoin, usdt , Ethereum and other currencies And this is done easily with the help from a pi merchant.
What is a pi merchant ?
Since pi is not launched yet in any exchange. The only way you can sell right now is through merchants.
A verified Pi merchant is someone who buys pi network coins from miners and resell them to investors looking forward to hold massive quantities of pi coins before mainnet launch in 2026.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
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Even tho Pi network is not listed on any exchange yet.
Buying/Selling or investing in pi network coins is highly possible through the help of vendors. You can buy from vendors[ buy directly from the pi network miners and resell it]. I will leave the telegram contact of my personal vendor.
@Pi_vendor_247
when will pi network coin be available on crypto exchange.DOT TECH
There is no set date for when Pi coins will enter the market.
However, the developers are working hard to get them released as soon as possible.
Once they are available, users will be able to exchange other cryptocurrencies for Pi coins on designated exchanges.
But for now the only way to sell your pi coins is through verified pi vendor.
Here is the telegram contact of my personal pi vendor
@Pi_vendor_247
how to sell pi coins at high rate quickly.DOT TECH
Where can I sell my pi coins at a high rate.
Pi is not launched yet on any exchange. But one can easily sell his or her pi coins to investors who want to hold pi till mainnet launch.
This means crypto whales want to hold pi. And you can get a good rate for selling pi to them. I will leave the telegram contact of my personal pi vendor below.
A vendor is someone who buys from a miner and resell it to a holder or crypto whale.
Here is the telegram contact of my vendor:
@Pi_vendor_247
What website can I sell pi coins securely.DOT TECH
Currently there are no website or exchange that allow buying or selling of pi coins..
But you can still easily sell pi coins, by reselling it to exchanges/crypto whales interested in holding thousands of pi coins before the mainnet launch.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and resell to these crypto whales and holders of pi..
This is because pi network is not doing any pre-sale. The only way exchanges can get pi is by buying from miners and pi merchants stands in between the miners and the exchanges.
How can I sell my pi coins?
Selling pi coins is really easy, but first you need to migrate to mainnet wallet before you can do that. I will leave the telegram contact of my personal pi merchant to trade with.
Tele-gram.
@Pi_vendor_247
Resume
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how to sell pi coins in South Korea profitably.DOT TECH
Yes. You can sell your pi network coins in South Korea or any other country, by finding a verified pi merchant
What is a verified pi merchant?
Since pi network is not launched yet on any exchange, the only way you can sell pi coins is by selling to a verified pi merchant, and this is because pi network is not launched yet on any exchange and no pre-sale or ico offerings Is done on pi.
Since there is no pre-sale, the only way exchanges can get pi is by buying from miners. So a pi merchant facilitates these transactions by acting as a bridge for both transactions.
How can i find a pi vendor/merchant?
Well for those who haven't traded with a pi merchant or who don't already have one. I will leave the telegram id of my personal pi merchant who i trade pi with.
Tele gram: @Pi_vendor_247
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how can i use my minded pi coins I need some funds.DOT TECH
If you are interested in selling your pi coins, i have a verified pi merchant, who buys pi coins and resell them to exchanges looking forward to hold till mainnet launch.
Because the core team has announced that pi network will not be doing any pre-sale. The only way exchanges like huobi, bitmart and hotbit can get pi is by buying from miners.
Now a merchant stands in between these exchanges and the miners. As a link to make transactions smooth. Because right now in the enclosed mainnet you can't sell pi coins your self. You need the help of a merchant,
i will leave the telegram contact of my personal pi merchant below. 👇 I and my friends has traded more than 3000pi coins with him successfully.
@Pi_vendor_247
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Unlock the potential of Latino Buying Power with this in-depth SlideShare presentation. Explore how the Latino consumer market is transforming the American economy, driven by their significant buying power, entrepreneurial contributions, and growing influence across various sectors.
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1. **Economic Impact:** Understand the profound economic impact of Latino consumers on the U.S. economy. Discover how their increasing purchasing power is fueling growth in key industries and contributing to national economic prosperity.
2. **Buying Power:** Dive into detailed analyses of Latino buying power, including its growth trends, key drivers, and projections for the future. Learn how this influential group’s spending habits are shaping market dynamics and creating opportunities for businesses.
3. **Entrepreneurial Contributions:** Explore the entrepreneurial spirit within the Latino community. Examine how Latino-owned businesses are thriving and contributing to job creation, innovation, and economic diversification.
4. **Workforce Statistics:** Gain insights into the role of Latino workers in the American labor market. Review statistics on employment rates, occupational distribution, and the economic contributions of Latino professionals across various industries.
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6. **Education:** Examine the educational achievements and challenges within the Latino community. Review statistics on enrollment, graduation rates, and fields of study. Understand the implications of education on economic mobility and workforce readiness.
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**Keywords:** Latino buying power, economic impact, entrepreneurial contributions, workforce statistics, media consumption, education, home ownership, Latino market, Hispanic buying power, Latino purchasing power.
what is the best method to sell pi coins in 2024DOT TECH
The best way to sell your pi coins safely is trading with an exchange..but since pi is not launched in any exchange, and second option is through a VERIFIED pi merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and pioneers and resell them to Investors looking forward to hold massive amounts before mainnet launch in 2026.
I will leave the telegram contact of my personal pi merchant to trade pi coins with.
@Pi_vendor_247
The European Unemployment Puzzle: implications from population agingGRAPE
We study the link between the evolving age structure of the working population and unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.
2. Introduction
THE MARKOWITZ paradigm for mean-variance portfolio
analysis involves two main components:
(1) The preferences of the beneficiary “Client”of the
portfolio's performance
(2) The opportunity set based on someone's subjective
estimates of security expected returns, risks and
correlations.
Most discussions assume that two people are involved the
“beneficiary” and the “investment manager”
3. Introduction
In practice the situation is often more complex. Some
investment funds (e.g. mutual funds) have many
beneficiaries. Others (e.g. some pension funds) are
managed by more than one investment firm. The
problem of optimal portfolio selection in such a context is
considerably more difficult than in the traditional setting.
W. F. SHARPE in this article concentrated on the
problem in which there is more than one investment
manager which is employed in the process of selecting
an investment portfolio.
4. Current Practice
If security markets are perfectly efficient and correspond
to the original capital asset pricing model, the
investment management problem is straightforward. But
if the markets are more complex, the task is more
difficult.
In 1980 the American Telephone and Telegraph
Corporation employed 112 investment managers for its
pension funds.
5. Current Practice
Each manager of a multiply managed portfolio is not
expected to select securities that "fit well" with the
remainder of the portfolio. Usually the manager does not
even know the composition of the rest of the portfolio.
There was a survey of large pension funds found that
only 23% of the respondents disagreed with the
statement:
"With multiple managers, the individual managers should
not be held responsible for coordinating investments
with the portfolios of other managers."
6. Current Practice
On the contrary, clients often give their managers
incentives to worry about relative performance as well
as absolute performance.
W. F. SHARPE has taken the phenomenon of
decentralized investment management on its own
ground and assumed that clients believe that they can
find superior investment managers.
7. Reasons for Decentralized Management
Investment managers perform many functions:
trading, record-keeping, risk and return estimation
and portfolio management. While special skills may
exist in trading, record keeping and management
per se, W. F. SHARPE focuses exclusively on the
prediction function.
Rightly or wrongly, a client who employs several
managers believes that the best predictions can be
obtained by some appropriate blend of the
predictions of the chosen managers.
8. Reasons for Decentralized Management
Why not replace decentralized management with
decentralized prediction-making and centralized
management ?
To answer this question one needs to consider the
economics of the investment prediction industry.
While the average cost of a set of predictions may
be substantial, the direct marginal cost of providing
them to another user is very small.
Moreover, a good set of predictions should be worth
more to a large investor than to a small one.
9. Reasons for Decentralized
Management
More specifically the value should be related to the
amount of money that will be influenced by the
predictions. The predictor has a monopoly on a set of
predictions and, if desiring to maximize profit, will wish to
employ price discrimination.
For effective price discrimination resale must be
precluded. The predictor will thus have an incentive to
make it difficult for other managers to obtain his or her
predictions. This is one reason why investment firms
may not wish to provide their predictions to the client,
since the latter might divulge them to competitors.
10. Reasons for Decentralized Management
But there is another, perhaps more important,
reason. If several sets of predictions are used for
a centralized decision it is difficult to determine the
value of one set for the overall portfolio, reducing
the scope for value-based pricing strategies.
Many managers refuse to "sell" their predictions.
Instead they require clients to give them money to
"manage." Their predictions are employed in the
management of such money, with management
fees based in whole or in part on the amount of
money under management.
11. Approaches to Decentralized Management
in order to illustrate why more than one investment
manager, we will use the term , first, "diversification of
style” — hiring experts on different sets of securities to
cover a polar case in which each manager analyzes a
completely different subset of the universe of securities.
Second, The term “diversification of judgment” — to
have more than one manager in case a manager makes
a large error. will be used to cover the other polar case
in which two or more managers analyze the same
subset of securities.
these can be treated as combinations of the two extreme
cases.
12. Previous Research
Decentralized investment management has received little
direct attention, but much of the theory of investment is,
of course, relevant.
Markowitz‘ mean-variance approach constitutes the basic
structure to be used here. Much of the analysis relies on
separation results.
13. Previous Research
Separation bas been employed in other contexts. In part
of the analysis we will utilize the idea of "consensus"
forecasts; these could be related to the key attributes of
an efficient market model. For generality we simply refer
to "consensus estimates,“ leaving the interpretation
open.
The first direct approach to separation in a nearly-
efficient market context was the active/passive
dichotomy
Much of this paper involves the restatement,
generalization, and extension of previous work. No claim
is made for complete originality.
14. Assumptions
While is the most natural form for the client's objective function, it is
convenient to transform it from expected return equivalent units to
variance
18. The first best assumptions
The vector Yp represents the optimal portfolio, and it can
be considered to be the sum of two vectors.
The first (GK) is a portfolio, while the second is a
constant (tp) times a set of divergences. For a client with
no tolerance for risk (GK) is the optimal portfolio—thus it
must be the minimum-variance portfolio, as indicated.
The second vector (GFp) indicates the optimal
divergence of each holding per unit of client risk
tolerance.
This separation result as "zero-beta" model, all clients
can be served by mixtures of two actual portfolios—one
based on tp = 0, the other on an arbitrarily large value of
tp.
19. Active-Passive Management
We turn now to the first case in which a client wishes to
choose a portfolio that is optimal for a specified "blend"
of predictions. In this case the ingredients are the
consensus forecasts of expected returns and those of a
single "active“ manager—i.e. one with beliefs that
diverge in at least some respects from those of the
consensus.
20. Active-Passive Management
The client is assumed to have determined an
appropriate weight Wk such that the optimal
estimate of a security's expected return is
given by:
26. Relative Performance Objectives
The active/passive approach is completely feasible if Wk
does not exceed 1. But what if a client wants a manager
to be more aggressive than normal—i.e. assigns a Wk
value greater than 1 to the manager's predictions? In
such a case Wc in (7b) becomes negative, implying a
short sale of the optimal passive portfolio in order to
generate extra money for active management.
As a practical matter, short sale of a passive portfolio is
likely to be costly or precluded entirely. However, the
desired result can be obtained in another way.
27. Relative Performance Objectives
In fact, the optimal portfolio can be achieved for any value
of Wk without hiring a passive manager if the active
manager is given an objective function that includes
relative performance.
The decisions required to maximize portfolio expected
return do not differ from those required to maximize the
expected difference between the return on the portfolio
and that of some standard portfolio.
28. Relative Performance Objectives
To represent "relative performance“ as a separate
objective thus requires modification of the treatment of
risk. For our purposes the appropriate standard is the
optimal passive portfolio for the client. A client
"concerned about relative performance" is interested in
the likely divergence of the portfolio's return from that of
the standard portfolio. This can be reflected in an
expanded objective function:.
31. Diversification of Style
We turn now to cases involving more than one
active manager. To make the notation as simple
as possible we will usually focus on situations
involving only two managers. Extensions to cases
with more than two managers are, however,
straightforward. We begin with the polar case in
which each manager analyzes a completely
separate subset of the universe of securities, with
no concern for the remainder or for any
interrelationships between securities in the
domain analyzed and those in the remainder of
the universe.