Unit 21 - Portfolio Mgmt

steps in asset allocation process

1) determine objectives & restraints

2) create investment policy statement IPS

3) determine asset allocation based on IPS

4) allocate capital

5) monitor and evaluate investments

tactical asset allocation

• short-term portfolio adjustments that adjust portfolio mix between asset classes in consideration of current market conditions and investor sentiment

• active management, relies on stock picking and market timing ability (mostly timing)

strategic asset allocation

• proportion o various types of investments composing a long-term investment portfolio

• passive manager, no style will outperform market, mirror index

fundamental analysis

• evaluate broad-based economic trends, current business conditions within an industry, and quality of particular corporations business, finance, and management (business, company, economy)

• dividend discount model, dividend growth model

technical analysis

• predict direction of prices on basis of charts reflecting price and trading volume patterns without regard to profitability (look at market, not individual)

• trendlines, support / resistance, moving averages, theories

dividend discount model

• states fair current market value of stock should be equal to present value of all future dividends

• annual dividend / expected return (IRR) = stock price

dividend growth model

• computes higher current stock price than dividend discount

• assumes annual dividend will grow at constant rate

what should you do in a breakout?

• resistance breakout → buy

• support break out → short sell

short interest theory

short interest reflects mandatory demand that creates support level for stock prices

• high short level is bullish and low short level is bearish

advance/decline theory

• decline > advances → bearish

• advances > declines → bullish

barbell strategy

purchase bonds maturing soon (2 yrs) and long term (10 yrs), no in between

• actively buy new bonds as old get closer

• most aggressive out of 3 bond strategies

bullet strategy

purchase a bunch of bonds at different types (ex: early) that all mature at same time

• allows investor to capture interest rates as they change rather than having entire portfolio locked onto one rate

ladder strategy

buy a bunch of bonds at same time with different maturities

capital asset pricing model CAPM

• maximize return while minimizing risk

• determine assets expected rate of return

modern portfolio theory

• specific risk can be diversified away by building portfolios of assets whose returns are not correlated → decreased correlation = decreased risk

• instead of emphasizing particular stocks, focuses on relationships among investments in a portfolio

• portfolio w least amount of volatility will do best

security market line

• determines expected return for a security on basis of beta and expectations about market and risk free rate

• determine how much over risk-free rate we should earn for taking the risk

• ([return of market - risk free rate] x beta) + risk free rate = expected return

capital market line CML

• expected return based on total level or risk as measured by the standard deviation

• diff between CML and SML is CML uses standard deviation and SML uses beta

efficient market hypothesis theory

• security prices adjust rapidly to new info with security prices fully reflecting all available info

• markets are efficiently priced

• three versions: weak, semi-strong, strong

• believers of this believe an efficient market is one that produces random results, no one has an edge, you win by getting lucky

weak form market efficiency

• current stock prices have incorporated all historical market data and trends

• technical analysis will not work

• fundamental analysis and insider info will

semi strong form market efficiency

• current stock prices reflect all historical data and reflect data from analyzing financial statements, industry, and current economic outlook

• technical and fundamental analysis will not work

• insider info will

strong form market efficiency

• prices fully reflect all public and private information

• technical and fundamental analysis and insider info will not work

• “random walk” or just being lucky will