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Chap027 - Chapter 27 The Theory of Active Portfolio...

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Chapter 27 - The Theory of Active Portfolio Management CHAPTER 27: THE THEORY OF ACTIVE PORTFOLIO MANAGEMENT PROBLEM SETS 1. Views about the relative performance of bonds compared to stocks can have a significant impact on how security analysis is conducted. For example, suppose that, as a result of a predicted decrease in interest rates, bonds are now expected to perform better than had previously been expected. In this scenario, the performance forecast may also reflect forecasts about the quality (credit) spreads for bonds. In addition to the implications of macro forecasts, the play on yields can have important implications for corporations in financial distress that have high degrees of leverage. The hierarchy of use of the model suggests a top-down analysis, starting with the BL model inputs. This does not rule out feedback in the opposite direction if, for example, the preponderance of security analysis suggests an unexpectedly good (or bad) economy (or sector of the economy).
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