PM 4: Market Timing and performance attibution

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

Card 4

Front

Linear timing ability graph

Back

Card 5

Front

Non-linear timing ability graph

Back

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PM 4: Market Timing and performance attibution