1. Asset Management Lecture 22

2. Review class

3. Asset management process 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? Risk aversion 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. 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  p /  (e p ) Sharpe Treynor Jensen Information ratio M2M2

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 Contribution from asset allocation Contribution from security selection Total contribution from asset class i

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