Professional Documents
Culture Documents
Where
U = utility
E ( r ) = expected return on the asset or portfolio
A = coefficient of risk aversion
s2 = variance of returns
= $300,000
=
90,000
= 46%
Vanguard
Fidelity
Portfolio P
Risk-Free Assets F
Portfolio C
113,400/300,000 = 0.378
96,600/300,000 =
0.322
210,000/300,000 =
0.700
90,000/300,000 =
300,000/300,000 =
0.300
1.000
Variance is:
Utility levels for various positions in risky assets (y) for an investor with
risk aversion A=4
= variance of security D
= variance of security E
= covariance of returns for security D and security E
Covariance
Correlation effects
Sharpe Ratio
Maximize the slope of the CAL for any possible portfolio, p
The objective function is the slope:
Behavioral Finance
How is the economy and the currency trend? (domestic and global)
What companies you would thing could be included in your watch lists?
The movement of stock prices from day to day DO NOT reflect any pattern.
EMH
Difficult.
You can make money only if your analysis is better than that of your
competitors.
Only serious analysis and uncommon techniques are likely to generate the
differential insight necessary to yield trading profits.
index fund
Investors optimal positions will vary according to factors such as age, tax
bracket, risk aversion, and employment.
Rather than to beat the market, the role of the portfolio manager in an
efficient market is to tailor the portfolio to these needs.
Magnitude Issue
After the fact there will have been at least one successful investment
scheme.
A doubter will call the results luck; the successful investor will call it
skill.
The proper test would be to see whether the successful investors can repeat
their performance in another period, yet this approach is rarely taken.
Long term
Weak-Form tests
Could speculators find trends in past prices that would enable them to
earn abnormal profits?
Momentum effect
Reversal effect
joint tests of the efficient market hypothesis and the risk adjustment
procedure.
usually, the risk adjustment technique is based on morequestionable assumptions than is the EMH.
Abnormal return due to the event is estimated as the difference between the
stocks actual return and a proxy for the stocks return in the absence of the
event
Such minimal effort to yield such large rewards: Plausible (masuk akal) ?
Small-Firm-in-January Effect
Liquidity Effects
The ability of insiders to trade profitability in their own stock has been
documented in studies by Jaffe, Seyhun, Givoly, and Palmon
The tendency for stock prices to rise after insiders intensively bought
shares and to fall after intensive insider sales.
Lakonishok, Shleifer, and Vishny argue that these effects are evidence
of inefficient markets
Mixed evidence
Ambiguity in results
Style changes
Persistence?
Survivorship bias
Behavioral Finance
Information Processing
High P/E
Conservatism bias: investors are too slow (too conservative) in updating their
beliefs in response to new evidence.
Behavioral Biases
Regret Avoidance: individuals who make decisions that turn out badly have
more regret when that decision was more unconventional.
The small size and high book-to-market effect by De Bondt and Thaler