Diversification: How Inefficient is the 1/N Portfolio Strategy? Victor DeMiguel London Business School Lorenzo Garlappi University of Texas at Austin Raman Uppal London Business School and CEPR Downloaded from http://rfs.oxfordjournals.org/ at BCV - Research Department on October 26‚ 2011 We evaluate the out-of-sample performance of the sample-based mean-variance model‚ and its extensions designed to reduce estimation error‚ relative to the naive 1/N portfolio. Of the 14 models we evaluate across
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$37.84(1.11) = +$42.00 Short 1 unit of risk-free +$100 -$100(1.05) = -$105 Net Cash Flow 0 +$4.13 What today will be $4.13/(1.05) = $3.93 2. You are the risk manager in a major investment bank. The bank’s current portfolio consists of U.S. stocks (50%)‚ bonds (20%)‚ and derivatives (30%). The expected returns and standard deviations of these investments are Expected Return 13% 7% 25% Standard Deviation 25% 9% 50% A trader comes with a idea about investing
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_____________________________________________________________________ Course Study Guide 2011–12 Course Code: BUS1331 Course title: Value Chain Management Course Leader: Dr. Michael Babula‚ MBA‚ PhD ____________________________________________________________________________ Contents 1. 2. WELCOME ........................................................................................................................................ 3 INTRODUCTION TO THE COURSE ......................
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exposure to each of these factors‚ and now summarized by a vector of factor loadings. The reward to the residual component in the return to a particular asset‚ unsystematic or idiosyncratic risk‚ can be made arbitrarily small simply by considering portfolios with an arbitrarily large number of assets. The basic point‚ however‚ is that the two theories capture two different sets of risks and address different aspects of the premium-awarding scheme for taking such risks. The CAPM‚ by its emphasis
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Topic 5: Risk and Return Learning Outcomes introduction to risk and return expected return and risk on individual asset expected return and risk on portfolio systematic and unsystematic risk diversification capital asset pricing model (CAPM) and the security market line Risk and Return M K Lai Page 2 Introduction to Risk and Return finance can be complicated‚ but it can be reduced to three basic concepts cash flows Risk and Return time value of money risk
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Portfolio Management Case 1: Alex Sharpe’s Portfolio Executive Summary As Alex Sharpe’s consultant‚ we recommend a portfolio of 78% S&P 500 and 22% of R.J Reynolds. This portfolio will generate an annual expected return of 8.86% (significantly higher than the index return 6.29%)‚ while the risk increases by only less than 10%. In Qualitative Analysis‚ we find that tobacco industry tends to move with the market less than the toy industry‚ which indicates that R.J Reynolds can diversity the
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equity risk premium. Edgar Lawrence Smith’s 1924 book Common Stocks as Long Term Investments […] was immediately cited by Yale’s Irving Fisher as an argument for investing in a diversified portfolio of equities over bonds.5 Fisher theorized that the trend towards investment in diversified portfolios of common stock had actually changed the equity premium in the 1920’s. Studies of various writers‚ especially Edgar Smith and Kenneth Van Strum have shown that in the long run stocks yield more
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Between CML AND SML CML vs SML CML stands for Capital Market Line‚ and SML stands for Security Market Line. The CML is a line that is used to show the rates of return‚ which depends on risk-free rates of return and levels of risk for a specific portfolio. SML‚ which is also called a Characteristic Line‚ is a graphical representation of the market’s risk and return at a given time. One of the differences between CML and SML‚ is how the risk factors are measured. While standard deviation is the measure
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ABSTRACT Modern portfolio managers find themselves facing an increasingly challenging situation with global asset allocation. The concept of traditional asset classification has been constantly questioned yet no consensus has been reached upon in either real practice or academia. Our research attempts to answer the question of whether or not the traditional asset class definition could prove to be optimal in terms of generating the best efficient frontiers‚ and if it exist alternatives to reach
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The company has since diversified into the sale of new‚ used‚ refurbished and collectible items in diverse categories. • In 2008‚ Amazon had eight warehouses in the U.S. and another fifteen in the rest of the world. Amazon supply chain portfolio • Amazon.com sells books‚ music‚ and other items over the Internet. • It is one of the largest e-commerce firms‚ with a market capitalization of more than $20 billion. • Amazon.com operates 7 websites that support their business
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