Active Portfolio Management.PPT

Active Portfolio Management Theory of Portfolio Management- Market Timing Market Timing v.s Buy and Hold Treynor-Black Model Steps of Active Portfolio Management Advantages of TB model TB Portfolio Selection Illustration of TB Model Theory of Active Portfolio Management Market timing portfolio construction Portfolio Evaluation Conventional Theory of evaluation Performance measurement with changing return characteristics Most managers will not beat the passive strategy (which means investing the market index) but exceptional (bright) managers can beat the average forecasts of the market Some portfolio managers have produced abnornal returns that are beyond luck Some statistically insignificant return (such 50 basis point) may be economically significant According the mean-variance asset pricing model, the objective of the portfolio is to maximize the excess return over its standard deviation(ie., according to the Capital Allocation Line (CAL)) buy and hold? CAL Return SD Assume an investor puts $1,000 in a 30-day CP (riskless instrument) on Jan 1, 1927and rolls it over and holds it until Dec 31, 1978 for 52 years, the ending value is $3,600 $1,000 $3,600 52 yrs An investor buys $1,000 stocks in in NYSE on Jan 1, 1978 and reinvests all its dividends in that portfolio. The the ending value of the portfolio on Dec 31, 1978 would be: $67,500 $1,000 $67,500 1/1 1978 Dec 31, 1978 Suppose the investor has perfect market timing in every month by investing either in CP or stocks , whichever yields the highest return, the ending value after 52 years is $5.36 billion ! The Treynor-Black model assumes that the security markets are almost efficient Active portfolio management is to select the mispriced securities which are then added to the passive market portfolio whose means and variances are estimated by the investment management firm unit Only a subset of securities are analyzed in the active portfolio Estimate the