1 fin 2802, spring 10 - tang chapter 27: practical portfolio management fin 2802: investments...
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1FIN 2802, Spring 10 - TangChapter 27: Practical Portfolio Management
Fin 2802: Investments
Spring, 2010Dragon Tang
Fin 2802: Investments
Spring, 2010Dragon Tang
Lecture 19Practical Portfolio Management
April 8, 2010
Readings: Chapter 27Practice Problem Sets: 1,2
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OverviewOverview
• Treynor-Black model– Optimization using analysts’ forecasts of superior
performance
– Adjusting model for tracking error
– Adjusting model for analyst forecast error
• Black-Litterman model
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Table 27.1 Construction and Properties of the Optimal Risky Portfolio (properties 1-5)
Table 27.1 Construction and Properties of the Optimal Risky Portfolio (properties 1-5)
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Table 27.1 Construction and Properties of the Optimal Risky Portfolio (properties 6-11)
Table 27.1 Construction and Properties of the Optimal Risky Portfolio (properties 6-11)
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Table 27.2 Stock Prices and Analysts’ Target Prices for June 1, 2006
Table 27.2 Stock Prices and Analysts’ Target Prices for June 1, 2006
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Figure 27.1 Rates of Return on the S&P 500 (GSPC) and the Six StocksJune 2005 – May 2006
Figure 27.1 Rates of Return on the S&P 500 (GSPC) and the Six StocksJune 2005 – May 2006
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Table 27.3 The Optimal Risky Portfolio with the Analysts’ New Forecasts Table 27.3 The Optimal Risky Portfolio with the Analysts’ New Forecasts
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Table 27.4 The Optimal Risk Portfolio with Constraint on the Active Portfolio (WA < 1)
Table 27.4 The Optimal Risk Portfolio with Constraint on the Active Portfolio (WA < 1)
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Figure 27.2 Reduced Efficiency when Benchmark Is Lowered Figure 27.2 Reduced Efficiency when Benchmark Is Lowered
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Table 27.5 The Optimal Risky Portfolio with the Analysts’ New Forecasts (benchmark risk constrained to 3.85%)
Table 27.5 The Optimal Risky Portfolio with the Analysts’ New Forecasts (benchmark risk constrained to 3.85%)
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Figure 27.3 Histogram of the Alpha ForecastFigure 27.3 Histogram of the Alpha Forecast
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Figure 27.4 Organizational Chart for Portfolio Management Figure 27.4 Organizational Chart for Portfolio Management
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Steps in the Black-Litterman ModelSteps in 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
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Figure 27.5 Sensitivity of Black Litterman Portfolio Performance to Confidence Level (view is correct)
Figure 27.5 Sensitivity of Black Litterman Portfolio Performance to Confidence Level (view is correct)
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Figure 27.6 Sensitivity of Black Litterman Portfolio Performance to Confidence Level (view is false)
Figure 27.6 Sensitivity of Black Litterman Portfolio Performance to Confidence Level (view is false)
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Table 27.6 M-Square for the Portfolio, Actual ForecastsTable 27.6 M-Square for the Portfolio, Actual Forecasts
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Table 27.7 M-Square for the Simulated PortfoliosTable 27.7 M-Square for the Simulated Portfolios
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Concluding Remarks on the Theory of Active InvestmentsConcluding Remarks on the Theory of Active 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 - TangChapter 27: Practical Portfolio Management
19FIN 2802, Spring 10 - TangChapter 27: Practical Portfolio Management
SummarySummary
• Treynor-Black model• Black-Litterman Model• Next Class: Performance Evaluation