Asset Management

- only takes volatilty into account that is created by returns below the target return

- Sortino Ration (Rmin)=(realised return of k - target return Rmin)/downside variance

advantage

- can be used when returns are not normally distributed

disadvantage

- subjective definition of target returns

- yet, they can be reconciled with personal risk aversions

= selecting single securities into a portfolio

- using the active share

1. weak form

2. semi-strong form

3. strong form

- all information on past price behavior is fully reflected in share prices

- techn. analysis is useless

- if every AM would be successful

- all publicly available information is fully reflected in the current price

- fundamental analysis is useless

- if a few AM would be successful

- all available information is fully reflected in the current price

- prices follow a random walk and not even insiders can predict share price development

- if none AM would be successful

Selection Bias!

- even if markets are not efficient, the average performance of all investors will be same as the market return

- the market return is the weighted average of passive returns + active returns

- if index funds have the same pre-fee return as the market, than the active average investor will also have the same pre-fee return

- this is a zero sum game, the average return of all active investors before costs is necessarily going  to equal the average return of the market

- active investment is usually more expensive than passive investment so active funds, as a group, will do worse than the index funds after fees.

- no amount of trding or research will change that, some will outperform, but as a group they will underperform

1. differences in service (reporting, convenience) can be largely ruled out as an explanation

2. mutual funds must always trade on their NAV, management skills are hence not priced and investors might make a bargain by selecting an "underpriced" fund that promises superior returns

3. for that explanation to hold, there must be eviedence for persistence in performance, ie. past performance of a fund should be predictive of future performance

4. investors do not know active funds perform badly

5. investors cannot switch to other funds, because of institutional boundaries

- use style analysis

- regress fund returns on indexes representing a range of asset classes

- the regression coefficient on each index measures the funds implicit allocation to that style 

- R^2 measures return variability due to style or asset allocation 

- the remainder is due either to security selection or to market timing

= is a two step procedure to the portfolio optimization problem, combining market an investors views 

1. What does the market think?

- very difficult to beat the market

- RA, Var-Cov-Matrix, weights betrachten

2. what does the investor think

- investors may (think to9 have more information and therefore hold divergent views

- if you do not have views, you hold the market portfolio (the benchmark)

- if specific views, how confident are you for them

combine these two steps!

- should limit unwanted losses and provide an asymmetric return distribution

- portfolio insurance strategies can be classified along two dimensions

- static vs dynamic

- path dependent vs path independent

..... was found to (verschlimmern) the situation and largely failed to insure portfolios

1. stock index falls

2. initial hedge is too small

3. need to sell more

4. more price pressure

- shifts all asset into the risk-free to ensure a minimal portfolio value

- a dynamic strategy that allows to shift between stocks and bonds to ensure a minimum value

1. X% Rules

- buy (sell) currency if exchange rate has appreciated (depreciated, an Wert verlieren) by X% after last trough (peak)

2. Moving Average Cross Over Rules

- short and long period moving averages 

- buy (sell) if short moving average crosses long moving average upwards (downwards)

- Black Rock Inc.

- Vanguard Group Inc.

- State Street Global Advisors

- Fidelity Investments

- JP Morgan AM

- mutual funds

- closed-end funds

ETF's

- unit investment trust

- actively managed funds

- ETF's

- fixed income

- specialities

1. Economies of scale & transaction costs

- easier information acquisition

- access to markets & securities

2. Hedging motives

- to reduce risks in the own book

- too meet liabilities due much later ( asset-liability) management

3. Legal constraints

- pension funds are usually only allowed to invest in investment grade bonds

- meet constraints defined by the fund sponsors

4. Risk reduction 

- fund assets are usually separated from asset manager's assets ( Sondervermögen)

- less balance sheet risk

5. Customer service

- high quality report of results

- record keeping for eg. tax-statements

1. Investors do stock picking

- the pick the wrong stocks

- haben nicht alle Informationen 

- viele vers. Produkte am Markt ( Investoren haben keinen Überblick)

- fehlende diversification

2. Investors do market timing 

- they do it wrong

1. Strategic Asset Allocation

- setting target (Ziel) allocations to asset classes

-periodically rebalancing the portfolio back to those targets as investment returns skew the original asset allocation percentages

2. Tactical Asset Allocation

- allows for a range of percentages in each asset class (such as stocks = 40-50%) and thereby allows to adopt the portfolio to (temporary) changes of market conditions

3. Security selection

- is about the final decisions in which securities (bonds, stocks, funds, options etc.) to invest.

1. Exchange traded or market priced

2. OTC

- shares/equity

- bonds

- money market instruments

- futures

- options

- mutual funds

- hedge funds

- ETF and index funds

- certificates

- geschlossene Fonds

- penny stocks

- forwards/swaps

- options

- open end investment funds

- closed end investmjent funds

- unit investement funds

- commonly known as mutual funds

- stands ready to redeem (zurückkaufen) or issue shares at NAV

- investeors can sell/buy the shares of the fund directly

- may have front-load (Eintrittsgebühr) oder rear-end sales charges (not permitted in GER)

- number of shares constantly changes

- number of shares is fixed - does not redeem or issue shares

- to invest, investors can buy shares on a primary or secondary market

- shares may sell at a discount or premium to NAV

- this might be due to illiquidity, high expense, poor performance, unrealized capital gains 

- typically an unmanaged, fixed income security portfolio

- most hold tax-exempt (steuer befreit) securities

- trust ceases (enden) to exist when security mature

- passive investment, major objective is capital prerservation (konservierung)

- enable investors to gain diversification with min operating costs