Lec8 - LECTURE 8 Active Portfolio Management and...

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AF3316 Investments Shaojun (Shaun) Zhang, Ph.D. ASA School of Accounting and Finance The Hong Kong Polytechnic University LECTURE 8 LECTURE 8 Active Portfolio Active Portfolio Management and Management and Performance Performance Evaluation Evaluation
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8-2 AF3316 Lecture 8 Superior Investment Performance • The ability to derive above-average returns for a given level of risk • Superior performance can be measured relative to • Benchmark portfolio • Market model or factor model • Superior performance can be achieved by – market timing – security selection • Consistency is important – During both up and down markets – Talent, experience, or chance?
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8-3 AF3316 Lecture 8 Measuring Investment Returns • One-period Return – No other cash flows such as dividends and coupons • r = (P 1 – P o ) / P o , or • (1 + r) = P 1 / P o . – With cash flows such as dividends and coupons • r = (P 1 + D 1 – P o ) / P o , or • (1 + r) = (P 1 + D 1 ) / P o .
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8-4 AF3316 Lecture 8 Measuring Investment Returns • Multiple-period Returns – Time-Weighted Returns vs Dollar-Weighted Returns • Consider the following example: – Dollar-weighted return calculation » r = 7.117%. » This is the DCF approach and r is called the IRR. » It is dollar weighted because the per-period return r is affected more by the 2nd period that has more money holding. 2 ) r 1 ( 2 * ) 54 2 ( r 1 2 r 1 53 50 + + + + = + + Outlay Proceeds per Share Year 0 $ 50 to purchase a share Year 1 $ 53 to purchase another share $2 dividend Year 2 $2 dividend + $54 resale value
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8-5 AF3316 Lecture 8 Measuring Investment Returns • Multiple-period Returns . – Time-weighted return calculation • This method ignores the number of shares held in each period and hence ignores the amounts invested in each period. – 1st year return = – 2nd year return = • Per-period return, r = (10% + 5.66%) / 2 = 7.83%. • Such measure is used in the money management industry because managers have no control on the amount of money invested. %. 10 50 50 2 53 = - + %. 66 . 5 53 53 2 54 = - +
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8-6 AF3316 Lecture 8 Average Return and Holding Period Return • No dividends or coupons – Example: Return Price ($) DPS ($) Quarterly Annually 89-1st Q 109.125 89-2nd Q 111.875 0 0.0252 89-3rd Q 109.25 0 -0.02346 89-4th Q 94.125 0 -0.13844 90-1st Q 106.125 0 0.12749 A.M. -0.0023 4*(-0.0023) = -0.00922 G.M. -0.00694 (1 - 0.00694) 4 - 1 = -0.02749 HPR -0.02749 Arithmetic average, r a = ± = N 1 t t r N 1 = (2.52 – 2.34 – 13.84 + 12.75) % / 4 = -0.23%. Geometric average, [ ] n / 1 n 2 1 g ) r 1 ( ) r 1 )( r 1 ( r + + + = & - 1 = 4 (1.02 * 0.98 * 0.86 * 1.13) – 1 = 0.9931 – 1 = -0.00694. Holding period return, P n / P o – 1 = 0.9725 – 1 = -0.027491.
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8-7 AF3316 Lecture 8 Average Return and Holding Period Return With dividends r g r a – ½ σ 2 .
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This note was uploaded on 06/06/2009 for the course AF AF3316 taught by Professor Shaojunzhang during the Spring '09 term at Hong Kong Polytechnic University.

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Lec8 - LECTURE 8 Active Portfolio Management and...

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