Chapter 12 - Equity Valuation

Chapter 12 - Equity Valuation

Fin Fin 2802: 2802: Investments Investments Spring, Spring, 2010 2010 Dragon Dragon Tang Tang Lecture 19 Practical Portfolio Management April 8, 2010 Readings: Chapter 27 Practice Problem Sets: 1,2 FIN 2802, Spring 10 - Tang

Chapter 27: Practical Portfolio Management 1 Overview Overview Treynor-Black model Optimization using analysts forecasts of superior performance Adjusting model for tracking error Adjusting model for analyst forecast error Black-Litterman model FIN 2802, Spring 10 - Tang Chapter 27: Practical Portfolio Management 2

Table Table27.1 27.1Construction Constructionand andProperties Propertiesof ofthe theOptimal OptimalRisky RiskyPortfolio Portfolio (properties (properties1-5) 1-5) FIN 2802, Spring 10 - Tang Chapter 27: Practical Portfolio Management 3

Table Table27.1 27.1Construction Constructionand andProperties Propertiesof ofthe theOptimal OptimalRisky RiskyPortfolio Portfolio (properties (properties6-11) 6-11) FIN 2802, Spring 10 - Tang Chapter 27: Practical Portfolio Management

4 Table Table27.2 27.2Stock StockPrices Pricesand andAnalysts AnalystsTarget TargetPrices Prices for forJune June1, 1,2006 2006 FIN 2802, Spring 10 - Tang Chapter 27: Practical Portfolio Management

5 Figure Figure27.1 27.1Rates Ratesof ofReturn Returnon onthe theS&P S&P500 500(GSPC) (GSPC)and andthe theSix SixStocks Stocks June June2005

2005May May2006 2006 FIN 2802, Spring 10 - Tang Chapter 27: Practical Portfolio Management 6 Table Table27.3 27.3The TheOptimal OptimalRisky RiskyPortfolio Portfoliowith withthe theAnalysts AnalystsNew

NewForecasts Forecasts FIN 2802, Spring 10 - Tang Chapter 27: Practical Portfolio Management 7 Table Table27.4 27.4The TheOptimal OptimalRisk RiskPortfolio Portfoliowith withConstraint Constraint on onthe

theActive ActivePortfolio Portfolio(WA (WA<<1) 1) FIN 2802, Spring 10 - Tang Chapter 27: Practical Portfolio Management 8 Figure Figure27.2 27.2Reduced ReducedEfficiency Efficiencywhen whenBenchmark BenchmarkIs IsLowered

Lowered FIN 2802, Spring 10 - Tang Chapter 27: Practical Portfolio Management 9 Table Table27.5 27.5The TheOptimal OptimalRisky RiskyPortfolio Portfoliowith withthe theAnalysts AnalystsNew NewForecasts Forecasts

(benchmark (benchmarkrisk riskconstrained constrainedto to3.85%) 3.85%) FIN 2802, Spring 10 - Tang Chapter 27: Practical Portfolio Management 10 Figure Figure 27.3 27.3 Histogram Histogram of of the the Alpha Alpha Forecast

Forecast FIN 2802, Spring 10 - Tang Chapter 27: Practical Portfolio Management 11 Figure Figure27.4 27.4Organizational OrganizationalChart Chartfor forPortfolio PortfolioManagement Management FIN 2802, Spring 10 - Tang Chapter 27: Practical Portfolio Management

12 Steps Steps in in the the Black-Litterman Black-Litterman Model Model Step 1: Estimate the covariance matrix from historical data Step 2: Determine a baseline forecast Step 3: Integrating the managers private views Step 4: Developing revised (posterior) expectations Step 5: Apply portfolio optimization FIN 2802, Spring 10 - Tang Chapter 27: Practical Portfolio Management

13 Figure Figure27.5 27.5Sensitivity Sensitivityof ofBlack BlackLitterman LittermanPortfolio PortfolioPerformance Performance to toConfidence ConfidenceLevel Level(view (viewisiscorrect) correct) FIN 2802, Spring 10 - Tang

Chapter 27: Practical Portfolio Management 14 Figure Figure27.6 27.6Sensitivity Sensitivityof ofBlack BlackLitterman LittermanPortfolio PortfolioPerformance Performance to toConfidence ConfidenceLevel Level(view (viewisisfalse) false)

FIN 2802, Spring 10 - Tang Chapter 27: Practical Portfolio Management 15 Table Table27.6 27.6M-Square M-Squarefor forthe thePortfolio, Portfolio,Actual ActualForecasts Forecasts FIN 2802, Spring 10 - Tang Chapter 27: Practical Portfolio Management

16 Table Table 27.7 27.7 M-Square M-Square for forthe theSimulated Simulated Portfolios Portfolios FIN 2802, Spring 10 - Tang Chapter 27: Practical Portfolio Management 17 Concluding ConcludingRemarks

Remarkson onthe theTheory Theoryof ofActive ActiveInvestments Investments The gap between theory and practice has been narrowing in recent years The CFA is expanding knowledge base in the industry Specific lack of application of the Treynor-Black model may be related to lack of application of adjusting for analysts errors FIN 2802, Spring 10 - Tang Chapter 27: Practical Portfolio Management 18

Summary Summary Treynor-Black model Black-Litterman Model Next Class: Performance Evaluation FIN 2802, Spring 10 - Tang Chapter 27: Practical Portfolio Management 19

Recently Viewed Presentations

  • Originality Report  Class (This quick guide was prepared

    Originality Report Class (This quick guide was prepared

    Originality Report - Class (This quick guide was prepared by ITO/ITSC.) Class List (C) 2007 . ITO. HKBU (C) 2007 . ITO. HKBU Originality Report - Individual Individual Student (C) 2007 .
  • Leveraging social media for student futures

    Leveraging social media for student futures

    The key is to be proactive: 1) connect with people and organizations that will further their interests 2) promote the positives in their lives and focus on the things that interest them 3) utilize the tools that exist to help...
  • Strengthening the Extension Brand - Mississippi State University

    Strengthening the Extension Brand - Mississippi State University

    Mississippi State University Extension Service. A little history. ... Every use of the Extension brand builds. on all the others. Done correctly, it all adds up! ... people want a resource they can trust. They also want . convenient access...
  • DIMACS/CINJ Workshop on Electronic Medical Records ...

    DIMACS/CINJ Workshop on Electronic Medical Records ...

    Speaking of HIPAA(the elephant in the room) "Covered entity" cannot use or disclose protected health information (PHI) data "explicitly" linked to a particular individual, or
  • Inventories- GAAP vs. IFRS

    Inventories- GAAP vs. IFRS

    IFRS - IAS 2. Inventory carried out at lower of cost or market (LOCOM). (330-8-35) Write-downs of inventories are required. Reversal of prior write-downs are not allowed. Write-downs can be done on an item-by-item, group-by-group, or total inventory basis. Write-downs...
  • Presentazione standard di PowerPoint

    Presentazione standard di PowerPoint

    Questo metodo è stato sviluppato a partire dal 1985 e si basa sui principi del metodo ABA e sul VerbalBehaviour di Skinner. E' una strategia che si basa sulla comunicazione attraverso lo scambio di, inizialmente, una singola immagine PECS e...
  • SD63 Energy Management Trevor Billy SD63 May 7,

    SD63 Energy Management Trevor Billy SD63 May 7,

    SD63 Energy Management Trevor Billy SD63 May 7, 2019 Results 14% reduction in GHG emissions $749,000 in external funding recovered over five years $280,000 annual savings Cost-effective projects with average 4 year payback (+ve budget impact) GHG Emissions by Source...
  • OVAE Organizational Chart - Amazon S3

    OVAE Organizational Chart - Amazon S3

    Peirce Hammond, Senior Advisor Grace Solares Francine Sinclair (Detailed from DATE) Tarik Barrett Kim Lawrence Joyce Whalen Nicole Young Nick Dorka Director Executive Office-----Sheryl Adler Christina Anzelmo Stephanie Briscoe Marilyn Burton Susie Cannon Adrienne Hutchings William Moser David Prevé Phillip...