PM 4: Market Timing and performance attibution

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  • Created by: charlie
  • Created on: 20-05-18 16:43
Active management: Stock selection outperforms (idiosyncratic risk/ active alpha)
Investor actively selects individual stocks
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Active management: Market timing under-performs (systematic risk/ active beta)
Investor forecasts when to be 'in the equity market' and when to be 'out' (in cash)/ based on: economic trends/ corporate info/ market factors/ ST price movements/ broad market movements
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No timing ability graph
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Linear timing ability graph
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Non-linear timing ability graph
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Testing for market timing ability (linear)
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Testing for market timing ability (non-linear)
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Implications: reviewing non-market timing fund (stock selection)
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Measuring performance: performance decomposition (Fama)
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Performance decomposition: 1) return from client risk (target Beta)
Having a target beta, client expects a return (systematic/ market risk only)/ on SML
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Performance decomposition: 2) Return from market timing (achieved beta)
Investing higher % of funds in risky assets when appropriate (systematic/ market risk only)/ on SML
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Performance decomposition: 3) Return from security selection (achieved return given achieved beta)
Takes on more total risk (residual risk/ idiosyncratic)/ not on SML / achieves alpha (if P > P')
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Performance decomposition: 4) Pure selectivity (was taking on extra residual risk worth it?)
Form portfolio P'' with same total risk (made up of only market risk/ lies on SML)/ Pure selectivity ? (if P > P'')
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Fama Performance decomposition goes beyond alpha
If +ve SELECTIVITY skills (-ve TIMING skills): allowed to choose own securities (someone else chooses comb P + rf)/ If +ve TIMING skills (-ve SELECTIVITY skills): allowed to choose comb. of Index + rf (someone else chooses index to invest in)
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Other cards in this set

Card 2

Front

Active management: Market timing under-performs (systematic risk/ active beta)

Back

Investor forecasts when to be 'in the equity market' and when to be 'out' (in cash)/ based on: economic trends/ corporate info/ market factors/ ST price movements/ broad market movements

Card 3

Front

No timing ability graph

Back

Preview of the front of card 3

Card 4

Front

Linear timing ability graph

Back

Preview of the front of card 4

Card 5

Front

Non-linear timing ability graph

Back

Preview of the front of card 5
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