Jensen risk adjusted return- Portfolio Return – Expected Return CAPM
Information Ratio- Alpha/residual SD
Calculate and understand the logic behind the M2 measure- Creates an adjusted portfolio that has the same SD as the maket. Because the market index and the adjusted portfolio have the same SD their returns should be comparable. M2= (R)adjusted portfolio – Rmarket…To make SD – SDmarket/SDportfolio…1-( SDmarket/SDportfolio) is the weight of T bills in the adjusted portfolio. The calculate returns as normal.
Understand how to detect and measure a manager’s ability to time the market.
Theory of Active Management, Chapter 27
Understand the Treynor-Black Model of efficient security analysis and be able to describe how it is implemented
Understand the limitations of the Treynor-Black Model and possible solutions to over-weighting.
Understand evaluation of managers through benchmark error.
Understand the definition of alpha and the distribution of alphas.
Understand and be able to apply The Fundamental Law of Active Management.
Understand the potential value of market timing and the potential cost.
Be familiar with the major market timing approaches and the logic behind these approaches.
Be familiar with the estimated likelihood of success required to profit from market timing.
Behavioral Finance, Chapter 12
Understand the basic principles of Behavioral Finance.