From Portfolio Choice to Asset Pricing Back to Portfolio Choice.

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Presentation transcript:

From Portfolio Choice to Asset Pricing Back to Portfolio Choice

Optimally Diversified Portfolios Mean Variance optimally diversified portfolios We will see problems in estimating future returns (estimation risk) And possible solutions to estimation risk (Shrinkage estimators, the Black Litterman Approach) Research on optimal portfolios without forecasts of expected retruns: Chris Julliard (LSE) on Entropy-Based Portfolio Choice

Passive Investing such as ETFs CAPM passive investing into wide stock indexes and wide bond indexes, proxying the market portfolios Cross sectional tests (both in Bodie Kane Marcus and in slides) show that these indexes are not Mean Variance Efficient We will study the relative performance of market cap-weights versus equal weighting

Smart Beta Investing APT pick the desired beta with respect to priced factors (SMB, HML, Momentum, TERM, DEF, INFLATION…) We constructed a Smart Beta portfolio in the Assignment Read articles in Miscellanea Directory. What do you think about the different views reported in the article «Smart beta can go wrong?»

Life Cycle Funds or Target Date Funds Optimal portfolios with non-tradeable human capital life- cycle funds We saw the following challenges: heterogeneity in optimal portfolios/age profiles, based on industry and education which metrics to measure the performance of TDF? how to report their risk and return? We understand the general risk management principles of «hedge portfolios». It applies to all non-tradeable assets of insurance companies, industrial companies etc.

Active Investing and Investing for the Long Run Requires predicting future returns based on newly available information We will see the difficulty of reliably predicting returns «out-of-sample» with linear predictive models Better chances of estimating «relative returns» rather than absolute returns Mix quant and fundamental analysis We will see how this impacts on the attractiveness of stocks for the long run

Alternative Investing Mean Variance Skew Kurt optimally diversified portfolios We will discuss the consequences of using the Sharpe Ratio to evaluate portfolio performance when returns are not Gaussian We will discuss Alternative Investing: optimal portfolios when preferences involve higher order moments and returns are not (log)normal.

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