Is Modern Portfolio Theory Still Modern?
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Our Approach to Equity Investing Generation to the Next)
VIEWPOINTS OCTOBER 2015, ISSUE 2 Our Approach to Equity Investing The ongoing debate between active versus passive management (also called “indexing”) in the context of equity investing may never be fully resolved. While the purpose of this Viewpoints is not an attempt to resolve the debate, we will briefly touch on the differences between these two approaches and the reasoning behind our approach to equity investing. At Houston Trust Company, we believe both approaches have merit, and each may be useful in achieving a given client’s needs and overall portfolio objectives. However, for the vast majority of our clients, we believe core holdings of high-quality, individual stocks managed (at reasonable cost) by independent, third party investment professionals offers a greater degree of flexibility, control and transparency, and can deliver competitive returns over long periods of time with lower volatility than passively managed index mutual funds. Indexing and Active Equity Active equity management, in contrast to indexing, Management Defined seeks to exploit perceived market inefficiencies in an attempt to outperform the underlying index, or In theory, passive equity investing entails simply benchmark, over time. The degree of outperformance replicating the holdings in an underlying index by is commonly referred to as a manager’s “alpha” purchasing the same securities in the same weights (i.e. the value-added return in excess of the appropriate as the index. In practice, however, what the investor benchmark which is attributable to the manager’s actually owns is a financial instrument, the return of skill). In simple terms, long-only active equity which reflects the return of the particular index (S&P managers will attempt to earn positive excess returns 500, EAFE, etc.) that the instrument is designed to by overweighting underpriced securities/industry replicate. -
An Overview of the Empirical Asset Pricing Approach By
AN OVERVIEW OF THE EMPIRICAL ASSET PRICING APPROACH BY Dr. GBAGU EJIROGHENE EMMANUEL TABLE OF CONTENT Introduction 1 Historical Background of Asset Pricing Theory 2-3 Model and Theory of Asset Pricing 4 Capital Asset Pricing Model (CAPM): 4 Capital Asset Pricing Model Formula 4 Example of Capital Asset Pricing Model Application 5 Capital Asset Pricing Model Assumptions 6 Advantages associated with the use of the Capital Asset Pricing Model 7 Hitches of Capital Pricing Model (CAPM) 8 The Arbitrage Pricing Theory (APT): 9 The Arbitrage Pricing Theory (APT) Formula 10 Example of the Arbitrage Pricing Theory Application 10 Assumptions of the Arbitrage Pricing Theory 11 Advantages associated with the use of the Arbitrage Pricing Theory 12 Hitches associated with the use of the Arbitrage Pricing Theory (APT) 13 Actualization 14 Conclusion 15 Reference 16 INTRODUCTION This paper takes a critical examination of what Asset Pricing is all about. It critically takes an overview of its historical background, the model and Theory-Capital Asset Pricing Model and Arbitrary Pricing Theory as well as those who introduced/propounded them. This paper critically examines how securities are priced, how their returns are calculated and the various approaches in calculating their returns. In this Paper, two approaches of asset Pricing namely Capital Asset Pricing Model (CAPM) as well as the Arbitrage Pricing Theory (APT) are examined looking at their assumptions, advantages, hitches as well as their practical computation using their formulae in their examination as well as their computation. This paper goes a step further to look at the importance Asset Pricing to Accountants, Financial Managers and other (the individual investor). -
The Portfolio Currency-Hedging Decision, by Objective and Block by Block
The portfolio currency-hedging decision, by objective and block by block Vanguard Research August 2018 Daren R. Roberts; Paul M. Bosse, CFA; Scott J. Donaldson, CFA, CFP ®; Matthew C. Tufano ■ Investors typically make currency-hedging decisions at the asset class rather than the portfolio level. The result can be an incomplete and even misleading perspective on the relationship between hedging strategy and portfolio objectives. ■ We present a framework that puts the typical asset-class approach in a portfolio context. This approach makes clear that the hedging decision depends on the strategic asset allocation decision that aligns a portfolio’s performance with an investor’s objectives. ■ A number of local market and idiosyncratic variables can modify this general rule, but this approach is a valuable starting point. It recognizes that the strategic asset allocation decision is the most important step toward meeting a portfolio’s goals. And hedging decisions that preserve the risk-and-return characteristics of the underlying assets lead to a portfolio-level hedging strategy that is consistent with the portfolio’s objectives. Investors often look at currency hedging from an asset- • The hedging framework begins with the investor’s class perspective—asking, for example, “Should I hedge risk–return preference. This feeds into the asset-class my international equity position?”1 Combining individual choices, then down to the decisions on diversification portfolio component hedging decisions results in and currency hedging. a portfolio hedge position. This begs the question: Is • Those with a long investment horizon who are a building-block approach the right way to arrive at the comfortable with equity’s high potential return and currency-hedging view for the entire portfolio? Does volatility will allocate more to that asset class. -
Post-Modern Portfolio Theory Supports Diversification in an Investment Portfolio to Measure Investment's Performance
A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Rasiah, Devinaga Article Post-modern portfolio theory supports diversification in an investment portfolio to measure investment's performance Journal of Finance and Investment Analysis Provided in Cooperation with: Scienpress Ltd, London Suggested Citation: Rasiah, Devinaga (2012) : Post-modern portfolio theory supports diversification in an investment portfolio to measure investment's performance, Journal of Finance and Investment Analysis, ISSN 2241-0996, International Scientific Press, Vol. 1, Iss. 1, pp. 69-91 This Version is available at: http://hdl.handle.net/10419/58003 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend -
Integrating Ecological Risk Assessment and Economic Analysis in Watersheds: a Conceptual Approach and Three Case Studies
EPA/600/R-03/140R September 2003 Integrating Ecological Risk Assessment and Economic Analysis in Watersheds: A Conceptual Approach and Three Case Studies National Center for Environmental Assessment Office of Research and Development U.S. Environmental Protection Agency Cincinnati, OH DISCLAIMER This document has been reviewed in accordance with U.S. Environmental Protection Agency policy and approved for publication. Mention of trade names or commercial products does not constitute endorsement or recommendation for use. ABSTRACT This document reports on a program of research to investigate the integration of ecological risk assessment (ERA) and economics, with an emphasis on the watershed as the scale for analysis. In 1993, the U.S. Environmental Protection Agency initiated watershed ERA (W- ERA) in five watersheds to evaluate the feasibility and utility of this approach. In 1999, economic case studies were funded in conjunction with three of those W-ERAs: the Big Darby Creek watershed in central Ohio; the Clinch Valley (Clinch and Powell River watersheds) in southwestern Virginia and northeastern Tennessee; and the central Platte River floodplain in Nebraska. The ecological settings, and the analytical approaches used, differed among the three locations, but each study introduced economists to the ERA process and required the interpretation of ecological risks in economic terms. A workshop was held in Cincinnati, OH in 2001 to review progress on those studies, to discuss environmental problems involving other watershed settings, and to discuss the ideal characteristics of a generalized approach for conducting studies of this type. Based on the workshop results, a conceptual approach for the integration of ERA and economic analysis in watersheds was developed. -
Six Steps to an Effective Asset Allocation Step 1
SIX STEPS TO AN EFFECTIVE ASSET ALLOCATION STEP 1 Define Your Goals Just as important as what you’re saving for is when you’ll need the money. Whether your goal is short term (up to three years), intermediate term (three to 10 years) or long term (10 years or longer) you will need to balance the amount of risk you are willing to assume with an investment strategy designed to meet your goal. The longer your time horizon, the more you should lean towards equities to take advantage of the potential returns historically associated with stock investments. The shorter your time horizon, the more you will need to weight your allocation toward fixed and cash investments to avoid the short- term volatility associated with stocks. If your aim is building retirement security, it’s important to remember that your time horizon extends far beyond the day you retire. Depending on when you retire, it is possible that your retirement will span 30 years or longer, which means your investments will need to keep working to provide future income and keep pace with inflation. Consider leaving some of your money invested in stocks, which provide the potential of growth to support your future needs. STEP 2 Gauge Your Risk Tolerance With investing, your risk tolerance should be based on two factors: your time horizon (see Step 1) and your attitude toward investment volatility. For example, if you’re not comfortable with the stock market’s inevitable ups and downs, you may be inclined to weight your portfolio toward fixed-income investments such as bonds and money markets. -
Comparison of Risk Adjusted Returns in Core-Satellite Portfolios: Changing the Conversation to Benefit the Smaller Investor by J
Comparison of Risk Adjusted Returns in Core-Satellite Portfolios: Changing the Conversation to Benefit the Smaller Investor by John A. Molster, Jr. A dissertation submitted to the faculty of Wilmington University in partial fulfillment of the requirements for the degree of Doctor of Business Administration Wilmington University October 2018 Comparison of Risk Adjusted Returns in Core-Satellite Portfolios: Changing the Conversation to Benefit the Smaller Investor by John A. Molster, Jr. I certify that I have read this dissertation and that in my opinion it meets the academic and professional standards required by Wilmington University as a dissertation for the degree of Doctor of Business Administration. Signed ___________________________________________________ John L. Sparco, Ph.D., Chairperson of Dissertation Committee Signed ___________________________________________________ Ruth T. Norman, Ph.D., Member of the Dissertation Committee Signed ___________________________________________________ Mary B. Lavoie, D.B.A., Member of the Dissertation Committee Signed ___________________________________________________ Kathy S. Kennedy-Ratajack, D.B.A. Dean, College of Business Table of Contents List of Tables .................................................................................................................... vii List of Figures .................................................................................................................. viii Dedication ......................................................................................................................... -
Portfolio Management Under Transaction Costs
Portfolio management under transaction costs: Model development and Swedish evidence Umeå School of Business Umeå University SE-901 87 Umeå Sweden Studies in Business Administration, Series B, No. 56. ISSN 0346-8291 ISBN 91-7305-986-2 Print & Media, Umeå University © 2005 Rickard Olsson All rights reserved. Except for the quotation of short passages for the purposes of criticism and review, no part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior consent of the author. Portfolio management under transaction costs: Model development and Swedish evidence Rickard Olsson Master of Science Umeå Studies in Business Administration No. 56 Umeå School of Business Umeå University Abstract Portfolio performance evaluations indicate that managed stock portfolios on average underperform relevant benchmarks. Transaction costs arise inevitably when stocks are bought and sold, but the majority of the research on portfolio management does not consider such costs, let alone transaction costs including price impact costs. The conjecture of the thesis is that transaction cost control improves portfolio performance. The research questions addressed are: Do transaction costs matter in portfolio management? and Could transaction cost control improve portfolio performance? The questions are studied within the context of mean-variance (MV) and index fund management. The treatment of transaction costs includes price impact costs and is throughout based on the premises that the trading is uninformed, immediate, and conducted in an open electronic limit order book system. These premises characterize a considerable amount of all trading in stocks. -
FX Effects: Currency Considerations for Multi-Asset Portfolios
Investment Research FX Effects: Currency Considerations for Multi-Asset Portfolios Juan Mier, CFA, Vice President, Portfolio Analyst The impact of currency hedging for global portfolios has been debated extensively. Interest on this topic would appear to loosely coincide with extended periods of strength in a given currency that can tempt investors to evaluate hedging with hindsight. The data studied show performance enhancement through hedging is not consistent. From the viewpoint of developed markets currencies—equity, fixed income, and simple multi-asset combinations— performance leadership from being hedged or unhedged alternates and can persist for long periods. In this paper we take an approach from a risk viewpoint (i.e., can hedging lead to lower volatility or be some kind of risk control?) as this is central for outcome-oriented asset allocators. 2 “The cognitive bias of hindsight is The Debate on FX Hedging in Global followed by the emotion of regret. Portfolios Is Not New A study from the 1990s2 summarizes theoretical and empirical Some portfolio managers hedge papers up to that point. The solutions reviewed spanned those 50% of the currency exposure of advocating hedging all FX exposures—due to the belief of zero expected returns from currencies—to those advocating no their portfolio to ward off the pain of hedging—due to mean reversion in the medium-to-long term— regret, since a 50% hedge is sure to and lastly those that proposed something in between—a range of values for a “universal” hedge ratio. Later on, in the mid-2000s make them 50% right.” the aptly titled Hedging Currencies with Hindsight and Regret 3 —Hedging Currencies with Hindsight and Regret, took a behavioral approach to describe the difficulty and behav- Statman (2005) ioral biases many investors face when incorporating currency hedges into their asset allocation. -
Active Management and Market Efficiency: a Summary of the Academic Literature
Active Management and Market Efficiency: A Summary of the Academic Literature Executive Summary This paper reviews the empirical evidence on trends in market efficiency in the United States and the role that active management plays in creating market efficiency. Efficient markets are among the cornerstones of developed economies. In an efficient market the prices of securities, on average, reflect the value of the assets underlying the securities. More efficient markets have three primary advantages: they encourage broader investor participation, they make diversifying risk easier and they encourage capital formation. Active management is the driver of market efficiency. Active managers perform research on issuers, analyze assets underlying securities and assess values. Through the buying and selling process, active managers establish the market prices for securities. By contrast, passive managers are usually “price takers” rather than “price makers.” Therefore, in the broadest terms, an increase in the amount of active management will lead to greater market efficiency, while an increase in passive management will reduce market efficiency. A body of academic literature studies how the increase in passively-managed assets – and the concomitant decrease in actively-managed assets – has affected market efficiency. Taken together, these studies suggest that: pricing efficiency has declined, return comovement has increased, securities prices are more volatile, liquidity has decreased and liquidity exhibits greater comovement. We believe that additional studies covering the most recent periods would be useful, as would studies that take a comprehensive view of indexing and that study the effect of indexing on IPOs. ACTIVE MANAGEMENT COUNCIL WHITE PAPER / MARKET EFFICIENCY: A SUMMARY OF THE ACADEMIC LITERATURE Introduction Efficient markets are among the cornerstones of developed economies. -
Swiss Asset Management Study 2020 an Overview of Swiss Asset Management
1 Inhaltsverzeichnis Inhaltsverzeichnis Swiss Asset Management Study 2020 An Overview of Swiss Asset Management Editors Jürg Fausch, Thomas Ankenbrand Institute of Financial Services Zug IFZ www.hslu.ch/ifz 1 Table of Contents Swiss Asset Management Study 2020 Table of Contents Preface 2 Executive Summary 3 1. Definition & Framework of Asset Management 5 2. The Swiss Asset Management Environment 12 3. Asset Management – An International Perspective 39 4. Asset Management Companies in Switzerland 47 5. Active versus Passive Investing – A Differentiated View on a Heated Debate 69 6. Conclusion & Outlook 77 7. Factsheets of Asset Management Companies in Switzerland 78 Authors 108 References 109 Appendix 120 2 Swiss Asset Management Study 2020 Preface The asset management industry is a growing segment of the Swiss financial center and offers a differentiating value proposition relative to private banking and wealth management. The strong expertise in asset manage- ment is highly relevant for Switzerland since it helps to diversify and complete the Swiss financial center. In this regard, the Asset Management Association Switzerland has the goal to further establish Switzerland as a leading provider of high quality asset management services and products domestically and abroad. In this context, the following study provides a comprehensive overview of the current status and various develop- ments in the Swiss asset management industry and consists of two parts. The first part starts with Chapter 1 in which a definition of asset management is provided and the methodological framework of the study is outlined. Chapter 2 gives an overview of the environment and discusses the political/legal, economic, social and technolog- ical developments relevant for the asset management industry. -
Large Cap Equity Fund
North Carolina Supplemental Retirement Plans Annual Review FEBRUARY 2013 Table of Contents • Defined Contribution Trends – Streamlining Investment Choices – DC Spend Down • Service Provider Disclosures – ERISA 408(b)(2) Regulations • Fee Review – NCSRP Fees – Stable Value Fund Fees • GoalMaker Discussion (Separate Slides) • Considering Other Fund Lineup Options • Fund Performance Review •Disclaimer MERCER 1 Defined Contribution Trends Trends for Large Plan Sponsors • Streamline number and types of investments offered – Combine style-specific (value/growth) choices for participants - Removes need to rebalance among styles - One fund choice that includes multiple underlying strategies across the style spectrum • Focus on retirement income MERCER 3 Streamlining Investment Choices • Research has shown that participants are neither good at making their own investment choices nor happy about this responsibility • Limited participant understanding remains one of the most significant challenges for plan sponsors • Plan sponsors are looking to: – Reduce redundant investment choices – Blend styles and managers – Lower risk for participants • Offering limited options allows clear and simple communication of plan • Allows each participant to create a portfolio that fits their risk tolerance and time horizon MERCER 4 Custom Funds Sample Large Cap Multi-Manager Structure Large Cap Equity Fund • Combining strategies with low or negative excess return correlations are expected to reduce the Index tracking error and increase the fund’s expected 5% information