FinEval Module 2.pdf - FINANCIAL EVALUATION AND STRATEGY...

Info icon This preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: FINANCIAL EVALUATION AND STRATEGY: INVESTMENTS with Scott Weisbenner MODULE 2 Motivating, Explaining, & Implementing the Capital Asset Pricing Model (CAPM) LESSON 2 -­ 1 Objectives and Overview VIDEO 2 -­ 1 Objectives and Overview THE CRADLE OF WESTERN CIVILIZATION… S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N UNIVERSITY OF ILLINOIS University of Illinois at Urbana–Champaign, Wikipedia, CC0 Public Domain Image from College of Business at Illinois S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N UNIVERSITY OF ILLINOIS SORRY FOR THE PLUG! University of Illinois at Urbana–Champaign, Wikipedia, CC0 Public Domain Image from College of Business at Illinois S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N THE CRADLE OF WESTERN CIVILIZATION – TRY 2500 YEARS EARLIER! TUBS, Wikimedia Commons, CC BY-­SA 3.0 S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N THE PARTHENON IN ATHENS! Steve Swayne, Wikipedia, CC BY 2.0 S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N SOCRATES, PLATO, AND ARISTOTLE! Jacques Louis David, Wikipedia, CC0 Public Domain;; Raphael, Wikipedia, CC0 Public Domain S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N THE GREEK ALPHABET! Image from bencrowder.net by Ben Crowder S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N GREEK ALPHABET α S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N GREEK ALPHABET β S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N EVERYONE IS TRYING TO GENERATE ALPHA! Isaac Elsevier, Wikimedia Commons, CC0 Public Domain ScienceDirect Logo, Wikipedia, CC0 Public Domain Image of journals.elsevier.com S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N ALPHA IS FRONT AND CENTER! Image from Morningstar.com S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N ALPHA IS FRONT AND CENTER! Image from Morningstar.com S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N BETA IS FRONT & CENTER ON STOCK SCREENS! Image from Yahoo.com S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N BETA IS FRONT & CENTER ON STOCK SCREENS! Image from Yahoo.com S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N BUT WHY IS BETA SO PROVOCATIVE? Bernstein, Peter L., Forbes Grinold, Richard C., Financial Analysts Journal Dubil Robert, Journal of Financial Planning Chan, Louis K.C. & Josef Lakonishok, Journal of Portfolio Management S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N MODULE 2 OVERVIEW 2-­1 Objectives and Overview 2-­2 Separation Theorem of Investments 2-­3 Examples of Reducing Portfolio Risk 2-­4 Capital Asset Pricing Model (CAPM) S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N MODULE 2 OVERVIEW 2-­5 Applications of CAPM 2-­6 Evaluation of Small-­Value Stock Investment Strategy, 1927-­2014 2-­7 Assignment 3 & Discussion: Analyzing & Identifying Three Mystery Securities 2-­8 Module 2 Review S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N HIGH-­ENGAGEMENT ACTIVITY Further practice estimating the CAPM and a 3-­Factor Model to evaluate the performance of four additional Mystery Securities Use results from regression analysis to help identify the characteristics of these securities S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N PRACTICAL KNOWLEDGE / EXPERIENCES Separation Theorem of investments Capital Asset Pricing Model (CAPM), ALPHA (α), and BETA (β) Practice estimating & analyzing regressions to evaluate real-­world securities S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N REFERENCES University of Illinois at Urbana–Champaign. “Logo for the University of Illinois at Urbana– Champaign”. Retrieved from https://zh.wikipedia.org/wiki/%E4%BC%8A%E5%88%A9%E8%AF%BA%E4%BC%8A%E5% A4%A7%E5%AD%A6%E5%8E%84%E5%B7%B4%E7%BA%B3-­ %E9%A6%99%E6%A7%9F%E5%88%86%E6%A0%A1#/media/File:UIUC.png College of Business at Illinois. 2009. Retrieved from https://business.illinois.edu/images/news_photos/2009-­12-­08-­leed-­3-­lg.jpg TUBS. 2011. “Greece in Europe.” Retrieved from http://commons.wikimedia.org/wiki/File:Greece_in_Europe_(-­rivers_-­mini_map).svg S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N REFERENCES Steve Swayne. 1978. “The Parthenon.” Retrieved from http://en.wikipedia.org/wiki/Acropolis_of_Athens#/media/File:The_Parthenon_in_Athens.jpg Jacques Louis David. 1787. “The death of Socrates.” Retrieved from http://en.wikipedia.org/wiki/File:David_-­_The_Death_of_Socrates_detail.jpg Raphael. 1509. “An elder Plato walks alongside Aristotle.” Retrieved from http://en.wikipedia.org/wiki/The_School_of_Athens#/media/File:Sanzio_01_Plato_Aristotle.jp g Ben Crowder. 2012. Retrieved from http://bencrowder.net/ S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N REFERENCES Isaac Elsevier. 1620. Retrieved from http://en.wikipedia.org/wiki/File:Elsevier.svg ScienceDirect. 2014. Retrieved from http://en.wikipedia.org/wiki/ScienceDirect#/media/File:ScienceDirect_logo.svg Journal of Financial Economics. Retrieved from http://www.journals.elsevier.com/journal-­of-­ financial-­economics/ FMAGX. 2015. “Morningstar risk & rating statistics.” Retrieved from http://performance.morningstar.com/fund/ratings-­ risk.action?t=FMAGX&region=usa&culture=en-­US FMAGX. 2015. “MPT statistics.” Retrieved from http://performance.morningstar.com/fund/ratings-­ risk.action?t=FMAGX&region=usa&culture=en-­US S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N REFERENCES NasdaqGS. “Tesla Motors.” Retrieved from http://finance.yahoo.com/q;;_ylt=AqjsUgiSTDKntz9yFmMVaPQnv7gF?uhb=uhb2&fr=uh3_fina nce_vert_gs&type=2butto%20n&s=TSLA NasdaqGS. “Panera Bread Co.” http://finance.yahoo.comq;;_ylt=AqjsUgiSTDKntz9yFmMVaPQnv7gFuhb=uhb2&fr=uh3_financ e_vert_gs&type=2button&s=PNRA Louis K.C. Chan and Josef Lakonishok, 1993, “Are the reports of beta’s death premature?,” Journal of Portfolio Management, Vol. 19(4), p. 51–62. Peter L. Bernstein. 1992. “If beta is dead, where is the corpse?” Forbes, July 20, p. 343. S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N REFERENCES Richard C. Grinold. 1993. “Is beta dead again?” Financial Analysts Journal, 49, p. 28–34. Robert Dubil. 2015. “How dumb is smart beta? Analyzing the growth of fundamental indexing.” Journal of Financial Planning, Vol. 28(3), p. 49–54 S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N FINANCIAL EVALUATION AND STRATEGY: INVESTMENTS with Scott Weisbenner MODULE 2 Motivating, Explaining, & Implementing the Capital Asset Pricing Model (CAPM) LESSON 2 -­ 2 Separation Theorem of Investments VIDEO 2 -­ 2.1 Objectives LESSON 2-­2 OBJECTIVES You will understand: Return-­volatility tradeoffs with two risky assets and one risk-­free asset Tangency Portfolio & Separation Theorem How to construct efficient portfolios with or without shorting assets S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N FINANCIAL EVALUATION AND STRATEGY: INVESTMENTS with Scott Weisbenner MODULE 2 Motivating, Explaining, & Implementing the Capital Asset Pricing Model (CAPM) LESSON 2 -­ 2 Separation Theorem of Investments VIDEO 2 -­ 2.2 Final General Portfolio Example and Tangency Portfolio THE FINAL GENERAL PORTFOLIO EXAMPLE Portfolio Choice with two risky assets & one risk-­free asset Reward-­Volatility charts and key portfolios generated from Excel file Return-­Volatility-­ EXAMPLES.xlsx S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N RETURN ASSUMPTIONS FOR VARIOUS ASSETS LARGE Stocks Mean Return: 8% Standard Deviation: 25% SMALL Stocks Mean Return: 15% Standard Deviation: 50% Correlation between LARGE & SMALL: 0.4 T-­Bills (Risk-­free asset) Mean Return: 3% Standard Deviation: 0% S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N PORTFOLIO CHOICE WITH 2 RISKY ASSETS & RISK-­ FREE ASSET Adding a risk-­free asset to LARGE and SMALL stocks improves investment opportunities. S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N PORTFOLIO CHOICE WITH 2 RISKY ASSETS & RISK-­ FREE ASSET Builds on intuition of: Risky/risk-­free asset tradeoff Efficient frontier with various risky assets S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N Average Portfolio Return (%) CAPITAL ALLOCATION LINE W/LARGE STOCKS & T-­BILLS 15 12 200% LARGE Stocks, -­‐100% RF 9 6 LARGE Stocks 3 0 0 10 20 30 Portfolio Standard Deviation (%) 40 50 LARGE Stocks S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N Average Portfolio Return (%) LARGE STOCKS & T-­BILLS, SMALL STOCKS & T-­BILLS 15 SMALL & RF Combinations 12 9 6 100% LARGE Stocks 3 0 0 10 LARGE & RF Combinations 20 30 Portfolio Standard Deviation (%) LARGE Stocks 40 200% LARGE Stocks, -­‐100% RF 50 SMALL Stocks S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N SMALL & RF BEATS LARGE & RF! Investment opportunities with only SMALL stocks and T-­Bills surpasses those with only LARGE stocks and T-­Bills Portfolio of 50% SMALL and 50% T-­Bills: Standard deviation: 25% Return: 9% S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N RETURN ASSUMPTIONS FOR VARIOUS ASSETS LARGE Stocks Mean Return: 8% Standard Deviation: 25% SMALL Stocks Mean Return: 15% Standard Deviation: 50% Correlation between LARGE & SMALL: 0.4 T-­Bills (Risk-­free asset) Mean Return: 3% Standard Deviation: 0% S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N PAUSE, THINK, AND ANSWER! Yair Haklai, Wikimedia Commons, CC BY-­SA 3.0 S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N QUESTION: CALCULATING SHARPE RATIOS Recall the Sharpe Ratio: Sharpe Ratioi = E[ri ] − rRF σi Sharpe Ratio for LARGE Stocks = Sharpe Ratio for SMALL Stocks = S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N ANSWER: CALCULATING SHARPE RATIOS Recall the Sharpe Ratio: Sharpe Ratioi = E[ri ] − rRF σi Sharpe Ratio for LARGE Stocks = Sharpe Ratio for SMALL Stocks = S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N ANSWER: CALCULATING SHARPE RATIOS Sharpe Ratio for LARGE Stocks = Sharpe Ratio for SMALL Stocks = S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N FINDING THE “TANGENCY” PORTFOLIO In our example, combining SMALL stocks and T-­Bills yields better investment opportunities than combining LARGE stocks and T-­Bills. S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N FINDING THE TANGENCY PORTFOLIO Can we find a portfolio of risky assets that combines with T-­Bills for even better investment opportunities than SMALL stocks and T-­Bills? YES – the Tangency Portfolio! Portfolio of risky assets with the highest Sharpe ratio S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N Average Portfolio return (%) THREE REWARD-­VOLATILITY FRONTIERS (ZOOM IN!) 15 12 9 LARGE & RF Combinations SMALL & RF Combinations 6 3 0 0 10 LARGE Stocks & RF 20 30 Portfolio Standard Deviation (%) SMALL Stocks & RF 40 50 LARGE & SMALL Stocks S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N Average Portfolio return (%) THREE REWARD-­VOLATILITY FRONTIERS (ZOOM IN!) 15 LARGE & S MALL Combinations 12 9 LARGE & RF Combinations SMALL & RF Combinations 6 3 LARGE & S MALL Combinations 0 0 10 LARGE Stocks & RF 20 30 Portfolio Standard Deviation (%) SMALL Stocks & RF 40 50 LARGE & SMALL Stocks S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N Average Portfolio return (%) LOCATING THE TANGENCY PORTFOLIO 18 15 Tangency Portfolio: 57% LARGE & 43% S MALL 12 9 6 3 0 0 10 LARGE Stocks & RF 20 30 Portfolio Standard Deviation (%) SMALL Stocks & RF 40 50 LARGE & SMALL stocks S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N TANGENCY PORTFOLIO FOUND! Tangency Portfolio 57% LARGE stocks 43% SMALL Stocks For best investment opportunities, allocate between Tangency Portfolio and T-­Bills S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N TANGENCY PORTFOLIO FOUND! Hold a portfolio somewhere on the red line Investors should NOT directly hold only LARGE or only SMALL stocks (except as part of the Tangency portfolio). S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N Average Por*olio return (in %) CAPITAL ALLOCATION LINE W/TANGENCY PORTFOLIO 18 15 12 9 LARGE Stocks 6 Tangency Por,olio: 57% LARGE & 43% SMALL SMALL Stocks 3 0 0 5 10 15 20 25 30 35 Por*olio Standard Devia6on (in %) 40 45 50 LARGE & SMALL Stocks SC O TT WEISBENNER , COLLEGE OF BUSINESS, UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGN Average Portfolio return (%) CAPITAL ALLOCATION LINE W/TANGENCY PORTFOLIO (ZOOM OUT!) 24 21 18 15 12 9 6 3 0 SMALL S tocks LARGE Stocks 0 10 20 Tangency Portfolio: 57% LARGE & 43% SMALL 30 40 50 60 70 Portfolio Standard Deviation (%) 80 90 100 LARGE & SMALL Stocks S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N MORE ON THE TANGENCY PORTFOLIO Tangency Portfolio 57% LARGE stocks 43% small stocks Sharpe ratio = (11.0-­3.0)/30.2 = 0.265 LARGE stocks are dominated by a portfolio that is 83% TANGENCY and 17% RF. Average return: 9.6% Standard deviation: 25% S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N MORE ON THE TANGENCY PORTFOLIO Tangency Portfolio 57% LARGE stocks 43% small stocks Sharpe ratio = (11.0-­3.0)/30.2 = 0.265 SMALL stocks are dominated by a portfolio that is 166% TANGENCY and -­66% RF. Average return: 16.3% Standard deviation: 50% S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N Average Portfolio return (%) OPTIMAL CAPITAL ALLOCATION LINE W/TANGENCY PORTFOLIO 24 21 18 15 12 9 6 3 0 SMALL S tocks LARGE Stocks 0 10 20 Tangency Portfolio: 57% LARGE & 43% SMALL 30 40 50 60 70 Portfolio Standard Deviation (%) 80 90 100 LARGE & SMALL Stocks S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N REFERENCES Yair Haklai. 2012. “Le Penseur at the California Palace of the Legion of Honor.” Retrieved from http://commons.wikimedia.org/wiki/File:Auguste_Rodin-­The_Thinker-­Legion_of_Honor-­ Lincoln_Park-­San_Francisco.jpg S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N FINANCIAL EVALUATION AND STRATEGY: INVESTMENTS with Scott Weisbenner MODULE 2 Motivating, Explaining, & Implementing the Capital Asset Pricing Model (CAPM) LESSON 2 -­ 2 Separation Theorem of Investments VIDEO 2 -­ 2.3 Two-Fund Separation Theorem and Applications Average Portfolio return (%) OPTIMAL CAPITAL ALLOCATION LINE W/TANGENCY PORTFOLIO 24 21 18 15 12 9 6 3 0 Tangency Portfolio 0 10 20 30 40 50 60 70 Portfolio Standard Deviation (%) 80 90 100 LARGE & SMALL Stocks S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N TWO-­FUND SEPARATION THEOREM Risk aversion determines the fraction of wealth invested in: Risk-­free asset Tangency Portfolio S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N KEY PROPONENT OF THIS ADVICE John Bogle, founder of Vanguard Group Image from vanguard.com S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N SIMPLE INVESTMENT ADVICE “Don’t look for the needle in the haystack. Just buy the haystack!” John Bogle, from the “Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns” Don’t try to beat the market – invest in index funds that track performance of broad asset categories that match your risk aversion/tolerance. S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N PASSIVE MANAGEMENT VIEW OF WORLD Modern Mechanix by Jim Moran, 1939 S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N ACTIVE ASSET MANAGEMENT VIEW OF WORLD James Lumb, Flickr, CC BY 2.0 S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N CAPM AND ITS DEVELOPMENT LED TO THIS… Nobel Prize, www.freestockphotos.biz Public Domain CC0 S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N NOBEL PRIZES! Harry Markowitz: wrote about mean-­variance efficient frontiers in 1950s Nobel Prize in 1990 James Tobin: first noted Separation Theorem in 1958 Nobel Prize in 1981 S C O T T W EIS B EN N E R , C OL L E GE OF B U S IN E SS , U N IV E R SIT Y O F IL L IN O IS A T U R BA N A -­C H A MP AIG N NOBEL PRIZES! Pricing individual stocks leads to Capital Asset Pricing Model (CAPM) Developed by William Sharpe (1964) & John Lintner (1965) Sharpe won Nobel Prize in 1990 S C O T T W EIS B EN N ...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern