1. Return and Risk Characteristics of ProIndex Fund
Over the previous five years, the return of the ProIndex fund have outperformed the S&P 500 index, as the 5-year-return is nearly 3 times than the benchmark and the annualised return is nearly 2 times than the benchmark. It means ProIndex fund has a significant increase in value within that period. However, the ProIndex Fund has a higher standard deviation which means it is more risk than the S&P 500 index. Especially for the annualised standard deviation, it is approximately 10% higher than the benchmark. The correlation coefficient between the ProIndex and benchmark is about 0.65 which means both two variables are positive changing consistently, but there are still some other factors which have impacts on the relationship between two variables as the correlation is less than 1. Furthermore, the higher beta, 1.0132, which is more than 1 and it may be one of the reasons for high risk as well since it is more sensitive to the market change. It means that the ProIndex fund would increase by 1.0132% if the market increased by 1%.
On the other hand, all Jensen 's alpha, Sharpe ratio and Treynor measure are used to indicate the risk-adjusted measurement of performance. Firstly,
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The active investment management is the investing style which the portfolio managers believe that the market is not efficient and the mispricing is existing. Therefore, they could outperform the market and gain the excess return through a series of investing strategy, such as stock selection and market timing. On the opposite, passive investment management is the one which the portfolio managers believe that the market is efficient and no one can beat the market so that there is no excess return. As a result, the passive portfolio managers always seek to replicate the performance of the market index to make
This assignment aims to employ a dynamic CPPI strategy and discuss its effectiveness in managing an Index Portfolio. After defining strategic criteria, we construct an optimal portfolio based on the Mean-Variance theory. We then manage it for the defined one-year period and apply classical (e.g. Sharpe Ratio, Treynor Ratio) as well as CPPI-specific (e.g. Omega Ratio, T2, M2) performance measures to create a consolidated portfolio view. Finally, using data form the Wharton Database we employ a multifactor analysis and discuss the performance of the managed Index Portfolio and its risk characteristics.
Financial market link to the real economy. Very often the markets are sensitive to many variables for example of most efficient managers with a SAT score above 1420, however according to “Chevalier and Ellison's manager characteristics model can explain only about 5% of the total variation in mutual fund returns” (James L. Davis), because the style-adjusted passive benchmark model has proved to be more efficient in work of the average mutual fund than the active one (James L. Davis).
In 1984, Mansueto founded Morningstar Inc., which provides independent investment research to individuals, financial advisors, and institutional advisors(Ferrell, Ferrell, & Hirt, 2015). Although they provide these services to financial and institutional advisors, their main focus is on individual investors. Mansueto found that the average investor often finds investing very confusing because there are a wide variety of investment choices. There are three types of investment choices: mutual funds, stocks, and bonds. Each of these three types of investment have thousands of options for investors to choose. A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term
The advantages of retaining internal control on endowment allocation across asset classes and managers are the assets manage by internal managers. Because of it, the decision making between Kings College bursar and investment committee regarding the endowment performance is efficient. Moreover, Kings College has no relationship and no administrative burden to take care of. Finally, passive investment in equity index funds fit with the risk preferences of investment committee. The long-run objectives were to achieve total return of 3.35% with the least possible risk.
As the newly promoted manager for Morningstar, Inc. and with the agency considering dropping stocks and bonds and focusing solely on mutual funds, I would have to think about the prospect of this venture and do some research of the agencies financial status in order to be able to thoroughly analyze this undertaking.
During the decade of the 1990’s through the year 2001 there were some major shifts in the deployment of investment assets. Based on a variety of measures, mutual funds grew dramatically as vehicles for investing in portfolios of stock. Specifically net cash flows into equity funds grew from $13 billion in 1990 to $310 billion in the year 2000.1 During that same period the number of equity funds rose from 1,100 to 4,395, while the number of accounts in those funds increased from 22 million to 162 million. The cumulative effect of the new money injected into equity funds, together with reinvestment of dividends, plus the attendant stock price appreciation has produced a phenomenal growth in total net assets. The market value of those assets mushroomed from $239 billion in 1990 to $3,962 billion in 2000.
Beta determines the risk a stock provides to a portfolio. Beta is the measurement of stock risk by using the standard deviation of the stock return, standard deviation of the market return, and the correlation between the stock and market returns (Brigham & Ehrhardt, 2015). Beta uses past data to determine future risk. However, in order for this prediction to be precise, the data behind the calculation must be stable for several years prior to the calculation (Terceño, Barberà-Mariné, Vigier, & Laumann, 2014). A beta higher than one represents higher risk when compared to the market average, and a stock with a beta of less than one represents a lower risk (Brigham & Ehrhardt, 2015). By using this risk calculation, an investor can compare betas of various stocks to determine the amount of risk they are comfortable with in the
The concept of beta has gained prominence due to the pioneering works of Sharpe (1963), Lintner (1965) and Mossin (1966). There are many studies that examine the behaviour and nature of beta. These studies include the impact of the length of the estimation interval, the stability of individual security beta as compared to portfolio beta, factors influencing the beta as well as the stability of beta in various market conditions.
More and more acholars believe that the theory of portfolio and the assumption of CAPM model are not match with real market condition, it cannot explain the pricing of capital assets comprehensively. There are large number of empirical studies have show that, the CAPM model is incompleted, because CAPM assume that variance of β is the only factor can affect the future rate of return. However, there are other factors that influnce the pricing of capital assets are emerging, such as book value, market price ratio and so on. Among them, CAPM was seriously called into question in the 1990s by Famar Fama and Franche (1992), they highligt that “beta is dead”. In Fama and Franche’s (1992) studies, they mainly focus on the relationship between the ratio of the book value of a firm’s common stock (BE) to its market value (ME) with rate of retrun of the stock. Fama and Franche (1992) concludes that there are two related points from the research. First, they conclude that BE/ME can basically explain the changes in stock retrun and it have better explanatory power than β. Because the report clear shows that during the period from 1941 to 1990 the relationship between β and average return is weak, moreover, there virtually have no link between β and average retrun from 1963 to 1990. Second, although CAPM model asserts that β is the only factor affect expected retruns on stocks, Fama and Franche (1992) also discovered that there is a negative relationship between the average return on a security with both the market-to-book of the firm ratio (M/B) and the price-earnings of the firm ratio (P/E). It can be seen that, β might not the only factor can affect the expected rate of
If Beta > 1: If the Beta of the stock is more prominent than one, then it infers larger amount of risk and unpredictability when contrasted with the stock business sector. In spite of the fact that the bearing of the stock value change will be same, in any case, the stock value developments will be somewhat extremes.
According to Bing Liang (1998) Hedge fund is private investment partnership in which the general partners make a substantial personal investment. The general partner’s offering memorandum usually allowed for the fund to take long or short position, use leverage and derivatives, invest is concentrated portfolio and move quickly between different market. Hedge fund often takes large risk on speculative strategies, including program trading, short sale, swap and arbitrage. Hedge fund is lightly regulated active investment vehicles with great trading flexibility. They are believed to pursue highly sophisticated investment strategies and promise to deliver returns to their investors that are unaffected by the vagaries of financial markets. The assets managed by hedge funds have grown substantially over the past decade, increasingly driven by portfolio allocations from institutional investors. According to Vikas Agarwal, Naveen D. Daniel and Narayan Y. Naik in recent years, the hedge fund industry has emerged as an alternative investment vehicle to the traditional mutual fund industry. It differs from the mutual fund industry in two important ways. First, hedge funds are much less regulated compared to mutual funds, with limited transparency and disclosure. Second, hedge funds charge performance-based incentive fees, which help align the interests of manager and investors. These differences have important implications for investment behavior of capital providers and the incentives of the hedge fund managers to deliver superior performance.
performance of average investors; however the seasoned investors do not get complete freedom to get
Simply put, both alpha and beta are risk ratios designed to determine the risk reward profile of investment
This paper will define and discuss five financial theories and how they impact business decisions made by financial managers. The theories will be the Modern Portfolio Theory, Tobin Separation Theorem, Equilibrium Theory, Arbitrage Pricing Theory (APT), and the Efficient Markets Hypothesis.
The CAPM is one of the most influential theories in finance, and it is widely used in applications (e.g. estimating the cost of the capital for firms) . Meanwhile, the CAPM is probably the most tested model. The beauty of the CAPM comes from its parsimony and elegance in establishing a linear relationship between risk and return. The CAPM indicates that if an investor wants to obtain a higher expected rate of return, he has to bear additional risk. It is derived on the basis of the mean-variance approach, which is first proposed by Markowitz (1959). The mean-variance approach claims that mean is a proxy of the asset’s return and variance stands for the risk which the asset bears. If two assets have the same return, the investor will choose to invest in the asset with lower degree of risk. If two assets have the same degree of risk, the investor will choose to buy the asset with higher return.