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Asset Management

Asset Management. Lecture Four. Outline for today. What assets to invest in a bear market? The BEARX Case Index model The optimal risky portfolio in the Single-factor index model The information ratio. What funds to invest in a bear market?. What funds to invest in a bear market?.

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Asset Management

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  1. Asset Management Lecture Four

  2. Outline for today • What assets to invest in a bear market? • The BEARX Case • Index model • The optimal risky portfolio in the Single-factor index model • The information ratio

  3. What funds to invest in a bear market?

  4. What funds to invest in a bear market? • Bear-market funds: designed to take advantage of market downturns by making investments whose value goes up when stock prices decline. • selling stocks short -- picking companies whose stock prices are expected to fall • betting against the market by using derivatives such as stock index futures and options

  5. What funds to invest in a bear market?

  6. What funds to invest in a bear market? What about 10 year return?

  7. The BEARX Case • Only the Prudent Bear fund (BEARX) has a positive 10-year return return. • BEARX strategy: • short-sale picks • Whole Foods Market • Starbucks • General Motors • Buy into the precious-metals sector • Gold • Miners such as Newmont Mining and AngloGold Ashanti

  8. The BEARX Case

  9. The BEARX Case

  10. The BEARX Case

  11. The BEARX Case

  12. The BEARX Case

  13. The BEARX Case • If you retired with $1 million with a 75% equity allocation and a 5% withdrawal rate, the value of the retirement portfolio after 20 years would be: • $ -180,727 if you retired in 1966 • $ -69,349 if you retired in 1972 • $3,575,760 if you retired in 1982

  14. The BEARX Case

  15. The BEARX Case

  16. The BEARX Case

  17. The BEARX Case • Why gold? • Gold can serve as a “safe haven” • Against inflation

  18. The BEARX Case

  19. The BEARX Case • Why gold? • Gold can serve as a “safe haven” • Against inflation • Against financial crisis

  20. The BEARX Case

  21. The BEARX Case

  22. The BEARX Case

  23. The BEARX Case • Why gold? • Gold can serve as a “safe haven” against inflation or financial crisis. • Gold often trades inversely to the U.S. dollar, making it a useful hedge in times of dollar depreciation.

  24. The BEARX Case

  25. The BEARX Case • Threats to dollar stability:

  26. The BEARX Case • Threats to dollar stability:

  27. The BEARX Case • Why gold? • Gold can serve as a “safe haven” against inflation or financial crisis. • Gold often trades inversely to the U.S. dollar, making it a useful hedge in times of dollar depreciation. • Gold can be viewed as an alternative asset class.

  28. The BEARX Case

  29. The BEARX Case • Why gold? • Gold can serve as a “safe haven” against inflation or financial crisis. • Gold often trades inversely to the U.S. dollar, making it a useful hedge in times of dollar depreciation. • Gold can be viewed as an alternative asset class. • Gold, and even gold stocks, typically are not closely correlated to either the stock or bond market.

  30. The BEARX Case

  31. The BEARX Case • Comments on BEARX • “Too One-Sided, Even in This Market” • BEARX “offers a very reliable and predictable course of action, so it's up to the investor to decide WHEN to use his services and WHEN NOT.”

  32. Optimal Risky Portfolio of the Single-Index Model Active portfolio Passive portfolio search for alpha efficient diversification N risky assets + the index portfolio

  33. Optimal Risky Portfolio of the Single-Index Model

  34. Optimal Risky Portfolio of the Single-Index Model Maximize the Sharpe ratio • Expected return, SD, and Sharpe ratio:

  35. Optimal Risky Portfolio of the Single-Index Model • Weight of active portfolio position:

  36. Optimal Risky Portfolio of the Single-Index Model • Modification of active portfolio position: • When

  37. The Information Ratio Information Ratio The Sharpe ratio of an optimally constructed risky portfolio will exceed that of the index portfolio (the passive strategy):

  38. The Information Ratio • The optimal weight for each security is

  39. Optimizing procedure

  40. Table 8.2 Comparison of Portfolios from the Single-Index and Full-Covariance Models

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