Đang tải... (xem toàn văn)
Portfolio management is the act of building and maintaining an appropriate investment mix for a given risk tolerance. The key factors for any portfolio management strategy involve asset allocation, diversification, and rebalancing rules. Active portfolio management seeks to “beat the market” through identifying undervalued assets, often through shortterm trades and market timing. Passive (indexed) portfolio management seeks to replicate the broader market while keeping costs and fees to a minimum.
7/15/2022 CONTENT Chapter 1: OVERVIEW OF THE INVESTMENT PROCESS Introduction Portfolio Management Process Individual Investor Life Cycle Lecturer: Dr LINH D NGUYEN FACULTY OF FINANCE BANKING UNIVERSITY OF HCMC TS Nguyễn Duy Linh INTRODUCTION A WHAT IS A PORTFOLIO? A What is a portfolio? A portfolio is a basket of assets that can include stocks, bonds, commodities, currencies, cash equivalents, as well as their fund counterparts Non-publicly tradable securities like real estate, art, and private investments can also be included in a portfolio B What is portfolio management C What is portfolio’s asset classes Asset allocation, risk tolerance, and the individual's time horizon are all critical factors when assembling and adjusting an investment portfolio TS Nguyễn Duy Linh TS Nguyễn Duy Linh 7/15/2022 B WHAT IS PORTFOLIO MANAGEMENT C WHAT IS PORTFOLIO’S ASSET CLASSES Portfolio management is the act of building and maintaining an An asset class is a grouping of investments that exhibit similar appropriate investment mix for a given risk tolerance The key factors for any portfolio management strategy involve asset allocation, diversification, and rebalancing rules characteristics and are subject to the same laws and regulations Equities (stocks), fixed income (bonds), cash and cash equivalents, real estate, commodities, futures, and other financial derivatives are examples of asset classes Active portfolio management seeks to “beat the market” There is usually very little correlation, through identifying undervalued assets, often through short-term trades and market timing Passive (indexed) portfolio management seeks to replicate the broader market while keeping costs and fees to a minimum and in some cases a negative correlation, between different asset classes Financial advisers focus on asset class as a way to help investors diversify their portfolio TS Nguyễn Duy Linh TS Nguyễn Duy Linh THE PORTFOLIO MANAGEMENT PROCESS THE PORTFOLIO MANAGEMENT PROCESS The unified presentation of portfolio management as a A CFA institute investment management process process represented an important advance in the investment management literature Portfolio management is a process – an integrated set of activities that combine in a logical, orderly manner to produce a desired product B The need for a policy statement C The importance of asset allocation TS Nguyễn Duy Linh TS Nguyễn Duy Linh 7/15/2022 A CFA INSTITUTE INVESTMENT MANAGEMENT PROCESS A CFA INVESTMENT MANAGEMENT PROCESS OVERVIEW 10 11 The elements of the investment process Planning: Establishing all the elements necessary for decision making (data about clients/capital markets) Execution: Details of optimal asset allocation and security selection Feedback: Adapting to changes in expectations and objectives and changes in portfolio composition Overview Investment Objectives Investment Constraints TS Nguyễn Duy Linh TS Nguyễn Duy Linh 10 11 CFA INVESTMENT MANAGEMENT PROCESS OVERVIEW CFA INVESTMENT MANAGEMENT PROCESS OVERVIEW 12 15 Planning Specification and quantification of Investor’s objectives, constraints, and preferences Components of the investment management process Feedback I Investment Policy Statement (IPS) A Identifying and specifying the investor’s objectives and constraints Monitoring investorrelated input factors B Creating the Investment Policy Statement C Forming capital market expectations Execution Portfolio construction and revision Determining target asset class weights Strategic asset allocation Security selection Port Implementation Port optimization Planning D Creating the strategic asset allocation (target minimum and maximum class weights) Attainment of investor objectives II Execution: Portfolio construction and revision A Asset allocation (including tactical) and portfolio optimization (combining assets to meet risk and return objectives) Performance measurement B Security selection C Implementation Relevant economic, social, political, and sector considerations Capital market expectations III Feedback Monitoring economic and market input factors A Monitoring (investor, economic, and market input factors) B Rebalancing C Performance evaluation TS Nguyễn Duy Linh TS Nguyễn Duy Linh 12 15 7/15/2022 CFA INVESTMENT MANAGEMENT PROCESS INVESTMENT OBJECTIVES CFA INVESTMENT MANAGEMENT PROCESS INVESTMENT OBJECTIVES 16 17 Capital preservation Means that investors want to minimize their risk of loss, usually in real terms: They seek to maintain the purchasing power of their investment The return needs to be no less than the rate of inflation The investor’s objectives are his investment goals, expressed in terms of both risk and returns Investment managers must assess the level of risk that investors can tolerate in pursuit of higher returns (risk–return trade-off) Risk tolerance: A function of an individual’s psychological makeup Also affected by other factors, such as a person’s current insurance coverage, cash reserves, family situation, and age Influenced by one’s current net worth and income expectations Capital appreciation Is an appropriate objective for investors who want the portfolio to grow in real terms over time to meet some future need Under this strategy, growth mainly occurs through capital gains Return objectives May be stated in terms of an absolute or a relative percentage return or a general goal, such as capital preservation, current income, capital appreciation, or total return TS Nguyễn Duy Linh TS Nguyễn Duy Linh 16 17 CFA INVESTMENT MANAGEMENT PROCESS INVESTMENT OBJECTIVES CFA INVESTMENT MANAGEMENT PROCESS INVESTMENT OBJECTIVES 18 19 Current income Investors want to generate income rather than capital gains Retirees may favor this objective for part of their portfolio to help generate spendable funds Investment Objective: 25-Year-Old Assume that he holds a steady job, is a valued employee, has adequate insurance coverage, and has enough money in the bank to provide a cash reserve Assume that his current long-term, high-priority investment goal is to build a retirement fund He can select a strategy carrying moderate to high amounts of risk because the income stream from his job will probably grow over time Further, given young age and income growth potential, a total return or capital appreciation objective is appropriate Total return strategy Investors want the portfolio to grow over time to meet a future need Increase portfolio value by both capital gains and reinvesting current income TS Nguyễn Duy Linh 18 TS Nguyễn Duy Linh 19 7/15/2022 CFA INVESTMENT MANAGEMENT PROCESS INVESTMENT OBJECTIVES CFA INVESTMENT MANAGEMENT PROCESS INVESTMENT OBJECTIVES 20 21 Investment Objective: 25-Year-Old Here’s a possible objective statement: Invest funds in a variety of moderate- to higher-risk investments The average risk of the equity portfolio should exceed that of a broad stock market index, such as the NYSE stock index Foreign and domestic equity exposure should range from 80 percent to 95 percent of the total portfolio Remaining funds should be invested in short- and intermediate-term notes and bonds Investment Objective: 65-Year-Old Assume that she has adequate insurance coverage and a cash reserve Let’s also assume she is retiring this year Depending on her income from social security and a pension plan, she may need some current income from her retirement portfolio to meet living expenses She also needs protection against inflation A risk-averse investor will choose a combination of current income and capital preservation strategies A more risk-tolerant investor will choose a combination of current income and total return in an attempt to have principal growth outpace inflation TS Nguyễn Duy Linh TS Nguyễn Duy Linh 20 22 21 CFA INVESTMENT MANAGEMENT PROCESS INVESTMENT OBJECTIVES HOW TO MAKE YOUR GOALS ACHIEVABLE 22 23 Investment Objective: 65-Year-Old Here’s an example of such an objective statement: Invest in stock and bond investments to meet income needs (from bond income and stock dividends) and to provide for real growth (from equities) Fixed-income securities should comprise 55–65 percent of the total portfolio; of this, 5–15 percent should be invested in short-term securities for extra liquidity and safety The remaining 35–45 percent of the portfolio should be invested in high-quality stocks whose risk is similar to the S&P 500 index SMART is an acronym that you can use to guide your goal TS Nguyễn Duy Linh TS Nguyễn Duy Linh SMART GOALS setting To make sure your goals are clear and reachable, each one should be: Specific (simple, sensible, significant) Measurable (meaningful, motivating) Achievable (agreed, attainable) Relevant (reasonable, realistic and resourced, results-based) Time bound (time-based, time limited, time/cost limited, timely, time-sensitive) 23 7/15/2022 CFA INVESTMENT MANAGEMENT PROCESS INVESTMENT CONSTRAINTS CFA INVESTMENT MANAGEMENT PROCESS INVESTMENT CONSTRAINTS 24 25 Constraints also affect the investment plan Liquidity needs Time horizon Tax concerns Legal and regulatory constraints Unique needs and preferences Liquidity Needs An asset is liquid if it can be quickly converted to cash at a price close to fair market value An investor may have a primary long-term goal, several nearterm goals may require available funds, ex., buy car, house, college tuition payments… Time Horizon Investors with long investment horizons generally require less liquidity and can tolerate greater portfolio risk Investors with shorter time horizons generally favor more liquid and less risky investments because losses are harder to overcome in a short time frame TS Nguyễn Duy Linh TS Nguyễn Duy Linh 24 25 CFA INVESTMENT MANAGEMENT PROCESS INVESTMENT CONSTRAINTS 26 27 Tax Concerns Investment planning is complicated by taxes that can seriously become overwhelming if international investments are part of the portfolio Taxable income from interest, dividends, or rents is taxable at the investor’s marginal tax rate A note regarding taxes: The impact of taxes on investment strategy and final results is clearly very significant Consult a tax accountant for advice regarding tax regulations TS Nguyễn Duy Linh 26 TS Nguyễn Duy Linh 27 7/15/2022 CFA INVESTMENT MANAGEMENT PROCESS INVESTMENT CONSTRAINTS CFA INVESTMENT MANAGEMENT PROCESS INVESTMENT CONSTRAINTS 28 29 Legal and Regulatory Factors Unique Needs and Preferences Covers the unique concerns of each investor Because each investor is unique, the implications of this final constraint differ for each person Each individual must decide on and then communicate these specific needs and preferences in their policy statement The investment process and the financial markets are highly regulated and subject to numerous laws Regulations can constrain the investment choices available to someone in a fiduciary role A fiduciary, or trustee, supervises an investment portfolio of a third party, such as a trust account or discretionary account All investors must respect certain laws, such as insider trading prohibitions TS Nguyễn Duy Linh TS Nguyễn Duy Linh 28 29 B THE NEED FOR AN INVESTMENT POLICY STATEMENT THE NEED FOR AN INVESTMENT POLICY STATEMENT 30 31 Important reasons for constructing an IPS: It helps the investor decide on realistic investment goals after learning about the financial markets and the risks of investing It creates a standard by which to judge the performance of the portfolio manager Protects the client against a portfolio manager’s inappropriate investments or unethical behavior Components of an Investment Policy Statement (IPS) Brief client description Purpose of establishing policies and guidelines Duties and investment responsibilities of parties involved Statement of investment goals, objectives, and constraints Schedule for review of investment performance and the investment policy statement Performance measures and benchmarks Any considerations in developing strategic asset allocation The first step before beginning any investment Investment strategies and investment styles program is to construct a comprehensive IPS Guidelines for rebalancing TS Nguyễn Duy Linh 30 TS Nguyễn Duy Linh 31 7/15/2022 C THE IMPORTANCE OF ASSET ALLOCATION THE IMPORTANCE OF ASSET ALLOCATION 32 33 Four decisions involved in constructing an investment strategy: The exhibit shows the relationship between returns on the target or policy portfolio allocation and actual returns on a sample mutual fund What asset classes should be considered for investment? What policy weights should be assigned to each eligible asset class? What are the allowable allocation ranges based on policy weights? What specific securities or funds should be purchased for the portfolio? About 90 percent of a fund’s returns over time can be explained by its target asset allocation policy The asset allocation decision involves the first three points How important is the asset allocation decision to an investor? In a word, VERY TS Nguyễn Duy Linh TS Nguyễn Duy Linh 32 33 INDIVIDUAL INVESTOR LIFE CYCLE A OVERVIEW 34 35 A Overview B Benefits of investing early C How much risk is right for you? D Initial risk and investment goal categories and asset allocations TS Nguyễn Duy Linh 34 TS Nguyễn Duy Linh 35 7/15/2022 OVERVIEW OVERVIEW 37 38 Accumulation phase Spending phase Early to middle years of working career Long investment time horizon and future earning ability Individuals typically willing to make relatively high-risk investments in the hopes of making above-average nominal returns over time Consolidation phase Past midpoint of careers Earnings greater than expenses Typical investment horizon for this phase is still long (20 to 30 years), so moderately high-risk investments are attractive Individuals in this phase are concerned about capital preservation and not want to take abnormally high risks Gifting phase TS Nguyễn Duy Linh May be concurrent with the spending phase Excess assets can be used to provide financial assistance to relatives or to establish charitable trusts as an estate planning tool to minimize estate taxes TS Nguyễn Duy Linh 37 38 B BENEFITS OF INVESTING EARLY C HOW MUCH RISK IS RIGHT FOR YOU, OR WHAT IS YOUR LEVEL OF RISK TOLERANCE ? 39 41 The Future Value of an Initial $10,000 Investment Interest rate 20 years 30 years 40 years The Future Value of the Initial Investment Plus the Annual Investment The Future Value of Investing $2,000 Annually “no pain, no gain” “no risk, no reward.” 7% $38,696.84 $76,122.55 ? $81,990.98 $188,921.57 ? $120,687.83 $265,044.12 ? $46,609.57 $100,626.57 $217,245.21 $91,523.93 $226,566.42 $518,113.04 $138,133.50 $327,192.99 $735,358.25 How you feel about risking your money will drive many of your investment decisions The risk-comfort scale extends from very conservative (you don’t want to risk losing a penny regardless of how little your money earns) to very aggressive (you’re willing to risk much of your money for the possibility that it will grow tremendously) As you might guess, most investors’ tolerance for risk falls somewhere in between 8% 20 years 30 years 40 years Giá trị tương lai số tiền = × 1+ Giá trị tương lai dịng tiền cuối kỳ = × 1+ Giá trị dòng tiền cuối kỳ = × − −1 / 1+ TS Nguyễn Duy Linh 39 Begins after retirement Living expenses are covered by social security income and income from prior investments, including employer pension plans The overall portfolio may be less risky than in the consolidation phase, but investors still need some risky growth investments, such as common stocks, for inflation protection TS Nguyễn Duy Linh 41 7/15/2022 C HOW MUCH RISK IS RIGHT FOR YOU, OR WHAT IS YOUR LEVEL OF RISK TOLERANCE ? HOW MUCH RISK IS RIGHT FOR YOU? 42 43 You win $300 in an office football pool You: (a) spend it on groceries, (b) purchase lottery tickets (c) put it in a money market account, (d) buy some stock On days when the stock market jumps way up, you: (a) wish you had invested more (b) call your financial advisor and ask for recommendations (c) feel glad you’re not in the market because it fluctuates too much (d) pay little attention Two weeks after buying 100 shares of a $20 stock, the price jumps to over $30 You decide to: (a) Buy more stock; it’s obviously a winner, (b) Sell it and take your profits (c) Sell half to recoup some costs and hold the rest, (d) Sit tight and wait for it to advance even more TS Nguyễn Duy Linh TS Nguyễn Duy Linh 42 43 HOW MUCH RISK IS RIGHT FOR YOU? HOW MUCH RISK IS RIGHT FOR YOU? 44 45 6) You have been working three years for a rapidly growing The owner of your apartment building is converting the units to condominiums You can buy your unit for $75,000 or an option on a unit for $15,000 (Units have recently sold for close to $100,000, and prices seem to be going up.) For financing, you’ll have to borrow the down payment and pay mortgage and condo fees higher than your present rent You: (a) buy your unit, (b) buy your unit and look for another to buy, (c) sell the option and arrange to rent the unit yourself, (d) sell the option and move out because you think the conversion will attract couples with small children TS Nguyễn Duy Linh 44 You’re planning a vacation trip and can either lock in a fixed room-andmeals rate of $150 per day or book standby and pay anywhere from $100 to $300 per day You: (a) take the fixed-rate deal (b) talk to people who have been there about the availability of lastminute accommodations, (c) book standby and also arrange vacation insurance because you’re leery of the tour operator, (d) take your chances with standby company As an executive, you are offered the option of buying up to 2% of company stock: 2,000 shares at $10 a share Although the company is privately owned (its stock does not trade on the open market), its majority owner has made handsome profits selling three other businesses and intends to sell this one eventually You: (a) purchase all the shares you can and tell the owner you would invest more if allowed, (b) purchase all the shares, (c) purchase half the shares, (d) purchase a small amount of shares TS Nguyễn Duy Linh 45 7/15/2022 PASSIVE EQUITY PORTFOLIO MANAGEMENT D METHODS OF INDEX PORTFOLIO INVESTING PASSIVE EQUITY PORTFOLIO MANAGEMENT METHODS OF INDEX PORTFOLIO INVESTING 50 51 Index Funds Index Funds In an indexed portfolio, the fund manager will typically attempt to replicate the composition of the particular index exactly The fund manager will buy the exact securities comprising the index in their exact weights Change those positions anytime the composition of the index itself is changed Low trading and management expense ratios The advantage of index mutual funds is that they provide an inexpensive way for investors to acquire a diversified portfolio Exchange-Traded Funds (ETF) TS Nguyễn Duy Linh TS Nguyễn Duy Linh 50 52 51 PASSIVE EQUITY PORTFOLIO MANAGEMENT METHODS OF INDEX PORTFOLIO INVESTING ACTIVE EQUITY PORTFOLIO MANAGEMENT 52 53 Exchange-Traded Funds (ETF) ETFs are depository receipts that give investors a pro rata claim on the capital gains and cash flows of the securities that are held in deposit by a financial institution that issued the certificates A significant advantage of ETFs over index mutual funds is that they can be bought and sold (and short sold) like common stock The notable example of ETFs Standard & Poor’s 500 Depository Receipts (SPDRs) iShares Sector ETFs A Overview TS Nguyễn Duy Linh TS Nguyễn Duy Linh B Tax efficiency and active equity management C Active share and measuring the level of active management 53 7/15/2022 ACTIVE EQUITY PORTFOLIO MANAGEMENT OVERVIEW ACTIVE EQUITY PORTFOLIO MANAGEMENT OVERVIEW 54 55 Goal is to earn a portfolio return that exceeds the return of a passive benchmark portfolio, net of transaction costs, on a risk-adjusted basis Need to select an appropriate benchmark Practical difficulties of active manager Transactions costs must be offset by superior performance visà-vis the benchmark Higher risk-taking can also increase needed performance to beat the benchmark TS Nguyễn Duy Linh TS Nguyễn Duy Linh 54 55 ACTIVE EQUITY PORTFOLIO MANAGEMENT B TAX EFFICIENCY AND ACTIVE EQUITY MANAGEMENT Equity Portfolio Investment Philosophies and Strategies Passive Management Strategies 57 Efficient Markets Hypothesis Buy and hold Active portfolio managers especially need to consider Indexing taxes when deciding whether to sell or hold a stock whose value has increased Active Management Strategies Fundamental Analysis “Top down” (e.g., asset class rotation, sector rotation) If a security is sold at a profit, capital gains are paid and less in left in the portfolio to reinvest A new security (the reinvestment security) needs to have a superior return sufficient to make up for these taxes The size of the expected return depends on the expected holding period and the cost basis (and amount of the capital gain) of the original security “Bottom up” (e.g., stock undervaluation/overvaluation) Technical Analysis Contrarian (e.g., overreaction) Continuation (e.g., price momentum) Factors, Attributes, and Anomalies Security characteristic factors (e.g., P/E, P/B, earnings momentum, firm size) Investment style factors (e.g., value, growth, volatility, company quality) Calendar effects (e.g., weekend, January) Information effects (e.g., neglect) TS Nguyễn Duy Linh 56 56 TS Nguyễn Duy Linh 57 7/15/2022 ACTIVE EQUITY PORTFOLIO MANAGEMENT TAX EFFICIENCY AND ACTIVE EQUITY MANAGEMENT ACTIVE EQUITY PORTFOLIO MANAGEMENT TAX EFFICIENCY AND ACTIVE EQUITY MANAGEMENT 58 59 Measures of Tax Efficiency Portfolio Turnover • Measured as the total dollar value of the securities sold from the portfolio in a year divided by the average dollar value of the assets Tax Cost Ratio 1 1 TAR 1 PTR 100 Where PTR = pretax return TAR = tax-adjusted return TS Nguyễn Duy Linh TS Nguyễn Duy Linh 58 59 ACTIVE EQUITY PORTFOLIO MANAGEMENT ACTIVE EQUITY PORTFOLIO MANAGEMENT C ACTIVE SHARE AND MEASURING THE LEVEL OF ACTIVE MANAGEMENT ACTIVE SHARE AND MEASURING THE LEVEL OF ACTIVE MANAGEMENT 60 61 A more direct way to assess how active a manager’s Active share statistic strategy is to look directly at the portfolio’s holdings compared to those in the benchmark Cremers and Petajisto (2009) have suggested calculating the portfolio’s active share measure as: Active Share AS The percentage of security holdings in the manager’s portfolio that differ from those in the benchmark index N wp,i wb,i i 1 Where: [wp,i, wb,i] represent the investment weight of the ith security in the managed portfolio (p) and benchmark index (b), respectively TS Nguyễn Duy Linh 60 TS Nguyễn Duy Linh 61 7/15/2022 ACTIVE EQUITY PORTFOLIO MANAGEMENT VALUE VERSUS GROWTH INVESTING ACTIVE SHARE AND MEASURING THE LEVEL OF ACTIVE MANAGEMENT 62 63 A growth investor focuses on the current and future economic “story” of a company, with less regard to share valuation A value investor focuses on share price in anticipation of a market correction and, possibly, improving company fundamentals Value stocks generally have offered somewhat higher returns than growth stocks, but this does not occur with much consistency from one investment period to another TS Nguyễn Duy Linh TS Nguyễn Duy Linh 62 63 VALUE VERSUS GROWTH INVESTING VALUE VERSUS GROWTH INVESTING 64 65 Growth-oriented investor will: Focus on EPS and its economic determinants Look for companies expected to have rapid EPS growth Assumes constant P/E ratio Value-oriented investor will: Focus on the price component Not care much about current earnings Assume the P/E ratio is below its natural level TS Nguyễn Duy Linh 64 TS Nguyễn Duy Linh 65 7/15/2022 VALUE VERSUS GROWTH INVESTING VALUE VERSUS GROWTH INVESTING 66 67 TS Nguyễn Duy Linh TS Nguyễn Duy Linh 66 67 VALUE VERSUS GROWTH INVESTING AN OVERVIEW OF STYLE ANALYSIS 68 69 Style analysis: Attempts to explain the variability in the observed returns to a security portfolio in terms of the movements in the returns to a series of benchmark portfolios capturing the essence of a particular security characteristic Determines the combination of long positions in a collection of passive indexes that best mimics the past performance of a security portfolio A simple style grid could be used to classify a manager’s performance along two dimensions: firm size (large cap, mid cap, small cap) and relative value (value, blend, growth) characteristics TS Nguyễn Duy Linh 68 TS Nguyễn Duy Linh 69 7/15/2022 E AN OVERVIEW OF STYLE ANALYSIS 70 Formally, style analysis relies on the constrained least squares procedure, with the returns to the manager’s portfolio as the dependent variable and the returns to the style index portfolios as the independent variables There are often three constraints employed: No intercept term is specified The coefficients must sum to one All the coefficients must be nonnegative TS Nguyễn Duy Linh 70 71 ASSET ALLOCATION STRATEGIES ASSET ALLOCATION STRATEGIES INTEGRATED ASSET ALLOCATION 72 73 An equity portfolio does not stand in isolation; it is part The integrated asset allocation strategy separately examines: of an investor’s overall investment portfolio The portfolio manager must consider the appropriate mix of asset categories in the entire portfolio There are four general strategies for determining the asset mix of a portfolio: integrated, strategic, tactical, and insured asset allocation methods Capital market conditions Investor’s objectives and constraints These factors are combined to establish the portfolio asset mix that offers the best opportunity for meeting the investor’s needs TS Nguyễn Duy Linh 72 71 TS Nguyễn Duy Linh TS Nguyễn Duy Linh 73 7/15/2022 ASSET ALLOCATION STRATEGIES INTEGRATED ASSET ALLOCATION 75 TS Nguyễn Duy Linh 74 74 TS Nguyễn Duy Linh 75 ASSET ALLOCATION STRATEGIES STRATEGIC ASSET ALLOCATION ASSET ALLOCATION STRATEGIES STRATEGIC ASSET ALLOCATION 76 77 Strategic asset allocation is used to determine the long- term policy asset weights in a portfolio Typically, long-term average asset returns, risk, and covariances are used as estimates of future capital market results Efficient frontiers are generated using this historical information, and the investor decides which asset mix is appropriate for his or her needs during the planning horizon This results in a constant-mix asset allocation with periodic rebalancing to adjust the portfolio asset weights TS Nguyễn Duy Linh 76 TS Nguyễn Duy Linh 77 7/15/2022 ASSET ALLOCATION STRATEGIES TACTICAL ASSET ALLOCATION ASSET ALLOCATION STRATEGIES INSURED ASSET ALLOCATION 78 79 Frequently adjusts the asset class mix in the portfolio to Results in frequent adjustments in the portfolio allocation, assuming that expected market returns and risks are constant over time, while the investor’s objectives and constraints change as his or her wealth position changes Involves only two assets, such as common stocks and Tbills take advantage of changing market condition Adjustments are driven solely by perceived changes in the relative values of the various asset classes Often based on the premise of mean reversion An inherently contrarian method of investing As stock prices rise, the asset allocation increases the stock component As stock prices fall, the stock component of the mix falls while the T-bill component increases TS Nguyễn Duy Linh 78 TS Nguyễn Duy Linh 79 7/15/2022 CONTENT Chapter 7: PORTFOLIO PERFORMANCE MEASUREMENT Time-Weighted and Money-Weighted Returns Composite Portfolio Performance Measures Lecturer: D r L I N H D N G U Y E N FA C U LT Y O F F I N A N CE BANKING UNIVERSITY OF HCMC TS Nguyễn Duy Linh TIME-WEIGHTED AND MONEY-WEIGHTED RETURNS TIME-WEIGHTED AND MONEY-WEIGHTED RETURNS A Time-Weighted Returns If markets are efficient, investors must be able to B Money-Weighted Returns measure asset management performance Two common ways to measure average portfolio return: C Time-Weighted vs Money-Weighted Returns Time-weighted returns (geometric mean return) Money-Weighted Returns/Dollar-weighted returns (IRR) Returns must be adjusted for risk TS Nguyễn Duy Linh TS Nguyễn Duy Linh 7/15/2022 A TIME-WEIGHTED RETURNS B DOLLAR-WEIGHTED RETURNS The time-weighted returns is the geometric mean Dollar-weighted returns is internal rate of return return Each period’s return has equal weight: (IRR) Returns are weighted by the amount invested in each period: 1+ = 1+ = 1+ × 1+ × 1+ × .× + × .× + PV −1 TS Nguyễn Duy Linh Cn C1 C2 1 r 1 r 1 r n TS Nguyễn Duy Linh TIME-WEIGHTED VS MONEY-WEIGHTED RETURNS Example: Total cash outlays are shown below, let’s compute time-weighted and money-weighted return $2 -$50 $4 + $108 -$53 TS Nguyễn Duy Linh TS Nguyễn Duy Linh 8 7/15/2022 COMPOSITE PORTFOLIO PERFORMANCE MEASURES A SHARPE PORTFOLIO PERFORMANCE MEASURES 10 11 This performance measure seeks to measure the total A Sharpe Portfolio Performance Measures risk of the portfolio by using the standard deviation of returns R RFR Si i B Treynor Portfolio Performance Measures C Jensen Portfolio Performance Measures D The Information Ratio Performance Measures i Where: : average rate of return for Portfolio during a specified time period : average rate of return on a risk−free investment during the same time period : standard deviation of the rate of return for Portfolio during the time period TS Nguyễn Duy Linh TS Nguyễn Duy Linh 10 11 SHARPE PORTFOLIO PERFORMANCE MEASURES SHARPE PORTFOLIO PERFORMANCE MEASURES 12 13 Demonstration of comparative Sharpe measures Suppose that during the most recent 10-year period, the average annual total rate of return (including dividends) on an aggregate market portfolio, such as the S&P 500, was 14% and the average nominal rate of return on government T-bills was 8% The standard deviation of the annual rate of return for the market portfolio over the past 10 years was 20% In addition, total rate of return and standard deviation of the annual rate of return for the portfolio D, E and F are as follows: Average Annual Rate of Return Standard Deviation of Return D 0.13 0.18 E 0.17 0.22 F 0.16 0.23 Let’s calculate the Sharpe measures for each of these funds TS Nguyễn Duy Linh 12 Portfolio TS Nguyễn Duy Linh 13 7/15/2022 SHARPE PORTFOLIO PERFORMANCE MEASURES B TREYNOR PORTFOLIO PERFORMANCE MEASURE 15 16 Rate of Return Treynor (1965) CML 0.20 0.18 SE 0.16 0.14 Risk SF Risk SM 0.12 Postulated two components of risk: produced by general market fluctuations resulting from unique fluctuations in the portfolio securities Introduced the characteristic line SD 0.10 Building on capital market theory, he introduced a risk-free 0.08 asset that could be combined with different portfolios to form a portfolio possibility line He showed that rational investors would always prefer the portfolio line with the largest slope 0.06 0.04 Standard Deviation of Return 0.02 0.0 0.1 0.2 0.3 0.4 Exhibit: Plot of Performance on CML (S Measure) TS Nguyễn Duy Linh TS Nguyễn Duy Linh 15 16 TREYNOR PORTFOLIO PERFORMANCE MEASURE TREYNOR PORTFOLIO PERFORMANCE MEASURE 17 18 The slope of this portfolio possibility line (designated T) is: Ti Comparing a portfolio’s T value to a similar measure for the market portfolio indicates whether the portfolio would plot above the security market line (SML) Calculate the T value for the aggregate market as follows: Ri RFR i Where: βi = slope of the fund’s characteristic line during that time period = − Where: βM = 1.0 (the market’s beta) TM = slope of the SML TS Nguyễn Duy Linh 17 TS Nguyễn Duy Linh 18 7/15/2022 TREYNOR PORTFOLIO PERFORMANCE MEASURE TREYNOR PORTFOLIO PERFORMANCE MEASURE 19 20 Demonstration of comparative Treynor measures Assume again that RM = 0.14 and RFR = 0.08 You are deciding between three different portfolio managers, based on their past performance: Investment Manager Average Annual Rate of Return Beta W 0.12 0.90 X 0.16 1.05 Y 0.18 1.20 TS Nguyễn Duy Linh Compute T values for the market portfolio and for each of the individual portfolio managers as follows: TS Nguyễn Duy Linh 19 20 TREYNOR PORTFOLIO PERFORMANCE MEASURES TREYNOR VS SHARPE MEASURE 22 23 Rate of Return SML 0.20 Ti TY 0.18 i Si Ri RFR i TX 0.16 For a completely diversified portfolio, T and S give identical 0.14 TM 0.12 performance rankings because systematic risk (β) and total risk (σ) are the same However, a poorly diversified portfolio could have a high ranking based on the Treynor ratio, which ignores unsystematic risk, but a much lower ranking with the Sharpe measure, which does not Any difference in rankings produced by T and S comes directly from a difference in portfolio diversification levels TW 0.10 0.08 0.06 0.04 Beta 0.02 0.0 0.5 1.00 1.50 2.00 Exhibit: Plot of Performance on SML (T Measure) TS Nguyễn Duy Linh 22 Ri RFR TS Nguyễn Duy Linh 23 7/15/2022 C JENSEN PORTFOLIO PERFORMANCE MEASURE JENSEN PORTFOLIO PERFORMANCE MEASURE 24 25 The Jensen measure (Jensen, 1968) was originally based on the Applying the Jensen Measure capital asset pricing model (CAPM), which calculates the expected one-period return on any security or portfolio by the following expression: R jt RFRt j j Rmt RFRt e jt αj indicates whether the portfolio manager is superior or inferior in her investment ability A superior manager has a significant positive α (alpha) value, while an inferior manager’s returns consistently fall short of expectations based on the CAPM, leading to a significant negative α The Jensen alpha measure of performance requires using a different RFR for each time interval during the sample period It does not directly consider the portfolio manager’s ability to diversify because it calculates risk premiums in terms of systematic risk The Jensen performance measure is flexible enough to allow for alternative models of risk and expected return than the CAPM Risk-adjusted performance (α) can be computed relative to any multifactor model: R jt RFRt j b j1 F1t b j F2t b jk Fkt e jt TS Nguyễn Duy Linh TS Nguyễn Duy Linh 24 25 D INFORMATION RATIO PERFORMANCE MEASURE 28 The information ratio (IR) measures a portfolio’s average return in excess of that for a benchmark portfolio divided by the standard deviation of this excess return: IR j R j Rb ER ER j ER Where: Rb average return for the benchmark portfolio during the period ER standard deviation of the excess return during the period TS Nguyễn Duy Linh 26 26 TS Nguyễn Duy Linh 28 7/15/2022 SUMMARIZING THE RISK-ADJUSTED PERFORMANCE MEASURES 31 Each of the risk-adjusted performance statistics just described is widely used in practice and has strengths and weaknesses 29 TS Nguyễn Duy Linh Performance Measure Risk-Adjustment Advantages Measure Treynor ratio (T ) Portfolio beta relative to market index proxy • Permits only relative assessments of performance for different portfolios • Difficult to interpret and assess statistical significance • Ignores unsystematic risk in a portfolio TS Nguyễn Duy Linh 29 31 Performance Measure Risk-Adjustment Measure Advantages Disadvantages Performance Measure Sharpe ratio (S) (1) Standard deviation of total portfolio return; or (2) Standard deviation of portfolio return in excess of risk-free rate • Simple and intuitive “benefit– cost” comparison of the risk– return trade-off • Linked conceptually to the CML and capital market theory • Simplest to calculate and widely used in practice • Permits only relative assessments of performance for different portfolios • Difficult to interpret and assess statistical significance • Ignores diversification potential of portfolio Jensen’s alpha (α ) (1) Portfolio beta relative to market index proxy; or (2) Portfolio betas relative to multiple risk factors • Most rigorous risk-adjustment • More difficult computation process separating systematic requiring formal regression and unsystematic risk analysis components • Diversification of portfolio • Can be adapted to either assessed in separate CAPM or multifactor models measure from performance of the risk–return trade-off • Alpha level and • Intuitive interpretation of significance can measure that permits vary greatly depending on statistical significance specification of returnassessment generating model Information Standard ratio (IR) deviation of portfolio return in excess of return to style-class benchmark index (i.e., tracking error) TS Nguyễn Duy Linh 32 • Simple and intuitive “benefit–cost” comparison of the risk–return trade-off • Linked conceptually to the SML and capital market theory • Relatively simple to calculate and widely used in practice Disadvantages 32 Risk-Adjustment Measure TS Nguyễn Duy Linh 33 Advantages Disadvantages • Direct comparison of portfolio performance compared to benchmark in investment style class • Simple and intuitive measure of the “benefit– cost” trade-off involved with active management • Flexible design permitting multiple benchmark comparisons • Permits only relative assessments of performance for different portfolios in a style class • Difficult to interpret and assess statistical significance • Implicitly assumes that portfolio and benchmark have similar levels of systematic risk 33