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

  • Chapter 1 The Nature of Strategic Management

    Chapter 1 The Nature of Strategic Management

    Steps to Developing Vision & Mission Statements. Have managers read related articles. Have managers prepare a vision and mission statement for the organization. Merge the documents into one and distribute. Gather feedback from managers. Meet to revise the final document
  • Supreme Court Cases Marbury v Madison - Crestwood Middle School

    Supreme Court Cases Marbury v Madison - Crestwood Middle School

    Gregg v Georgia (1976) 1. Troy Leon Gregg was hitchhiking to Florida. 2. Georgia is where the murder took place. 3. Gregg was convicted of killing 2 men who gave him a ride. 4. Does the death penalty constitute "...
  • ETHNIC AMERICA - Matinf.ektf.hu

    ETHNIC AMERICA - Matinf.ektf.hu

    During this time my copy-book was the board fence, brick wall, and pavement ; my pen and ink was a lump of chalk. With these, I learned mainly how to write. I then commenced and continued copying the italics in...
  • PHENOLIC SECRETS: Exploring Finishing Tannins in Maturation and

    PHENOLIC SECRETS: Exploring Finishing Tannins in Maturation and

    vanillin "vanilla" Product 1 Product 2 Product 3 Product 4 138 39 93 110. ... Chatonnet, P. 1995. Influence des proceeds de tonnellerie et des techniques d'élevage sur la composition et la qualité des vinsélevésenfûts de chêne. PhD Thesis. Université...
  • Teknik Bioseparasi Anggota Kelompok Aristo Gumanti 115100601111010 Aisyah

    Teknik Bioseparasi Anggota Kelompok Aristo Gumanti 115100601111010 Aisyah

    Daya 30 watt. Generator pembanding. 20 kHz 100 W. Bahan dan metode. Bahan dan metode. Jurnal 1 : Sel ditumbuhkan pada medium. Diambil 0,6 g/ L . A.peroxydans. Disonifikasi selama 140 menit. Disentrifugasi 40.000 rpm selama. 60 menit untuk memisahkan...
  • Maths Workshop for Parents - Hodnet Primary School

    Maths Workshop for Parents - Hodnet Primary School

    Display a traditional calendar. Board games that involve dice and spinners - helps not only with counting but with the concepts of chance. Traditional playing cards - simple games such as snap are a natural way of learning about sorting...
  • Welcome to Pre-MOT Advising

    Welcome to Pre-MOT Advising

    There is not a separate admission process for part-time students. Students desiring a part-time schedule will petition the OT faculty after. they have been accepted to the OTD Program. The part-time program essentially splits the first academic year into two...
  • CPS 120 - Washtenaw Community College

    CPS 120 - Washtenaw Community College

    Class Schedule Text Computer Science Illuminated by Nell Dale and John Lewis, published by Jones and Bartlett Publishers, copyright 2002, ISBN: -7637-1760-6 Recommended Computers Simplified, 5th Edition, Published by IDG Books Worldwide Inc., copyright 2000, ISBN: -7645-3524-2 Introduction to Computer...