Download Applied Asset and Risk Management: A Guide to Modern Portfolio Management and Behavior-Driven PDF

TitleApplied Asset and Risk Management: A Guide to Modern Portfolio Management and Behavior-Driven
File Size10.7 MB
Total Pages491
Table of Contents
                            Foreword
Preface
	Reference
Contents
1 Risk Measures in Asset Management
	1.1 Introduction
	1.2 Measuring Investment Returns
		1.2.1 Notation
		1.2.2 Basic Performance Measures
		1.2.3 Random Variable and Expected Value
	1.3 Traditional Risk and Risk-Adjusted Return Measures
		1.3.1 Volatility
			1.3.1.1 Sample vs. Population
			1.3.1.2 Conclusion
		1.3.2 Tracking Error
			1.3.2.1 Note
			1.3.2.2 Interpretation
			1.3.2.3 Conclusion
		1.3.3 Relationship of Tracking Error and Alpha
		1.3.4 Covariance and Correlation
			1.3.4.1 Notes
			1.3.4.2 Properties of Covariance and Correlation
		1.3.5 Beta
			1.3.5.1 Interpretation
			1.3.5.2 Note
			1.3.5.3 Conclusion
		1.3.6 Bull and Bear Market Beta
			1.3.6.1 Interpretation
			1.3.6.2 Conclusion
		1.3.7 Sharpe Ratio
			1.3.7.1 Notes
			1.3.7.2 Interpretation
			1.3.7.3 Conclusion
		1.3.8 Information Ratio
			1.3.8.1 Note
			1.3.8.2 Interpretation
			1.3.8.3 Conclusion
		1.3.9 Treynor Ratio
			1.3.9.1 Interpretation
			1.3.9.2 Note
			1.3.9.3 Conclusion
	1.4 Advanced Risk and Risk-Adjusted Return Measures
		1.4.1 Maximum Absolute Drawdown
			Conclusion
		1.4.2 Maximum Relative Drawdown
			1.4.2.1 Interpretation
			1.4.2.2 Conclusion
		1.4.3 Semi-deviation and Semi-variance
			1.4.3.1 Interpretation
			1.4.3.2 Conclusion
		1.4.4 Shortfall Probability
			1.4.4.1 Interpretation
			1.4.4.2 Conclusion
		1.4.5 Sortino Ratio
			1.4.5.1 Interpretation
			1.4.5.2 Conclusion
	1.5 Portfolio Return and Volatility
	1.6 Summary
	References
2 Modern Portfolio Theory and Its Problems
	2.1 Introduction
	2.2 A Quick Review of Regression Analysis
		2.2.1 Simple Linear Regression
		2.2.2 Multi-Linear and Non-Linear Regression
	2.3 The Capital Asset Pricing Model (CAPM)
		2.3.1 Introduction
		2.3.2 Assumptions
		2.3.3 The Model
		2.3.4 Empirical Tests
			2.3.4.1 The Testable Hypotheses
			2.3.4.2 Regressions
			Cross-Sectional Regression
			Time-Series Regression
			2.3.4.3 Beta Stability
			2.3.4.4 Tests of the Main Hypotheses
				Black, Jensen and Scholes (1972): The Capital Asset Pricing Model: Some Empirical Tests
				Fama and MacBeth (1973): Risk, Return, and Equilibrium: Empirical Tests
				Fama and French (1992): The Cross-Section of Expected Stock Returns
			Construction of Beta-Based Portfolios
			Construction of Size-Based Portfolios
			Construction of Size-β Portfolios
			Construction of B/M-based Portfolios
			Fama–MacBeth Regression
			Other Empirical Tests and the Revival of Beta
			2.3.4.5 Roll's Critique: The Market Portfolio Problem
		2.3.5 Evaluation of the CAPM
		2.3.6 A Critical View of the CAPM Assumptions
			2.3.6.1 Zero-Beta CAPM
			2.3.6.2 Different Borrowing and Lending Rates
			2.3.6.3 Transaction Costs
			2.3.6.4 Heterogeneous Expectations, Investment Horizons and Taxes
	2.4 The Fama–French Three-Factor Model
		2.4.1 Introduction
		2.4.2 The Model
		2.4.3 Theoretical Explanations of the Fama–French Three-Factor Model
		2.4.4 Empirical Tests
			2.4.4.1 fama1993: Common Risk Factors in the Returns on Stocks and Bonds
			2.4.4.2 Other Empirical Tests
	2.5 Summary
	References
3 Stock Market Anomalies
	3.1 Introduction
	3.2 Weekend Effect
		3.2.1 Description
		3.2.2 Evidence
		3.2.3 Explanations
		3.2.4 Persistence
		3.2.5 Summary
	3.3 January Effect
		3.3.1 Description and Evidence
		3.3.2 Explanations
		3.3.3 Persistence
	3.4 Turn-of-the-Month and Holiday Effect
		3.4.1 Description
		3.4.2 Evidence
		3.4.3 Explanations
		3.4.4 Persistence
	3.5 S&P 500 Index Effect
		3.5.1 Description
		3.5.2 Evidence
		3.5.3 Explanations
			3.5.3.1 Certification
			3.5.3.2 Imperfect Substitutes
			3.5.3.3 Liquidity Improvement
			3.5.3.4 Price Pressure
			3.5.3.5 Recognition from Investors
		3.5.4 Persistence
		3.5.5 Summary
	3.6 Trading by Insiders
		3.6.1 Description
		3.6.2 Evidence and Insider Behavior
		3.6.3 Information Effect
		3.6.4 Stealth Trading Hypothesis
		3.6.5 Newspaper and Mimicking
		3.6.6 Persistence
	3.7 Momentum of Industry Portfolios
		3.7.1 Description
		3.7.2 Evidence
		3.7.3 Explanations
			3.7.3.1 Irrationality of the Agents
			3.7.3.2 Lead Lags in Information Dissemination
			3.7.3.3 Herding Behavior
			3.7.3.4 Market Friction
			3.7.3.5 Dividend Growth Rate Variations Through Time
		3.7.4 Persistence
	3.8 Home Bias and International Investing
		3.8.1 Description
		3.8.2 Evidence of the Advantages of International Investing
		3.8.3 Explanations
			3.8.3.1 Adverse Selection Problem
			3.8.3.2 Shadow Costs
			3.8.3.3 Information Costs
			3.8.3.4 Foreign Inflation
			3.8.3.5 Optimistic or Certain Expectations About Domestic Markets Versus Foreign Markets
			3.8.3.6 Irrational Behavior and the Overconfidence of Market Agents
		3.8.4 Summary
	3.9 Value Line Enigma
		3.9.1 Description of Value Line Ranking System Timeliness
		3.9.2 Evidence of Outperformance
		3.9.3 Possible Explanations for Abnormal Returns
			3.9.3.1 Post-announcement Drift
			3.9.3.2 New Information Provided by Value Line
			3.9.3.3 Construction Scheme of Timeliness
			3.9.3.4 Macroeconomic Factors
		3.9.4 Possible Explanations for Implementation Shortfall
			3.9.4.1 Trading Costs and Cash Disposal
			3.9.4.2 Victim of Its Own Success
		3.9.5 Persistence
	3.10 Expiry of IPO Lockups
		3.10.1 Description
		3.10.2 Evidence
		3.10.3 Explanations
			3.10.3.1 Adverse Selection
			3.10.3.2 Stock Momentum
			3.10.3.3 Market Inefficiency
		3.10.4 Persistence
	3.11 Summary
	References
4 Stock Market Crashes
	4.1 Introduction
	4.2 What is a Crash?
	4.3 Before a Crash: A Bubble
	4.4 Characteristics of a Crash
	4.5 Crashes with Regional Impact
		4.5.1 Tulip Mania (1637)
		4.5.2 South Sea Bubble (1720)
		4.5.3 Railway Mania (1846)
		4.5.4 Souk Al-Manakh (1982)
		4.5.5 Dubai Real Estate Bubble (2009)
		4.5.6 Greek Crisis (2010)
		4.5.7 Flash Crash of May 6, 2010
			4.5.7.1 A Description
			4.5.7.2 The Official Reason for the Flash Crash
			4.5.7.3 Practitioners Explain the Flash Crash
			4.5.7.4 Consequences of the Flash Crash
			4.5.7.5 The Flash Crash from 1962
		4.5.8 Conclusion
	4.6 International Crashes
		4.6.1 The Great Wall Street Crash (1929)
		4.6.2 The Asian Financial Crisis (1997)
			4.6.2.1 Initial Market Conditions
			4.6.2.2 Alerts and Signals
			4.6.2.3 Triggering Events
			4.6.2.4 Effects of the Withdrawal
			4.6.2.5 The International Monetary Fund Intervention
			4.6.2.6 The Rating Agencies' Fatal Role in the Crisis
			4.6.2.7 Summary
		4.6.3 The Russian Financial Crisis (1998)
			4.6.3.1 Inheritance of the USSR and Optimistic Views: 1992–1997
			4.6.3.2 The Asian Crisis Launches a Currency Crisis
			4.6.3.3 Worldwide Contagion: The Case of Long Term Capital Management
			4.6.3.4 Summary
		4.6.4 Dotcom Bubble (2001)
		4.6.5 Subprime Crisis (2007)
		4.6.6 Conclusion
	4.7 Forecasting a Bubble: A Case Study
		4.7.1 How to Spot a Bubble?
		4.7.2 China: A Stock Exchange and Real Estate Case
	4.8 Summary
	References
5 Explaining Stock Market Crashes: A Behavioral FinanceApproach
	5.1 Introduction
	5.2 What Is Behavioral Finance?
		5.2.1 A Short Introduction to Behavioral Finance
		5.2.2 Historical Overview
	5.3 Behavioral Biases and Stock Market Crashes
		5.3.1 Availability Bias
			5.3.1.1 Definition
			5.3.1.2 The Subcategories of Availability Bias
			5.3.1.3 Protection Method
		5.3.2 Representativeness Bias
			5.3.2.1 Definition
			5.3.2.2 Example
			5.3.2.3 Base-Rate Neglect Bias
			5.3.2.4 Sample-Size Neglect Bias
			5.3.2.5 Protection Method
		5.3.3 Herding Bias
			5.3.3.1 Definition
			5.3.3.2 The Asch Experiment
			5.3.3.3 Protection Method
		5.3.4 Overoptimism Bias
			5.3.4.1 Definition
			5.3.4.2 Example 1
			5.3.4.3 Example 2
			5.3.4.4 Example 3
			5.3.4.5 Example 4
			5.3.4.6 Protection Method
		5.3.5 Overconfidence Bias
			5.3.5.1 Definition
			5.3.5.2 Example 1
			5.3.5.3 Example 2
			5.3.5.4 Types of Overconfidences
			5.3.5.5 Example 3
			5.3.5.6 Example 4
			5.3.5.7 Example 5
			5.3.5.8 Protection Method
		5.3.6 Anchoring Bias
			5.3.6.1 Definition
			5.3.6.2 Example 1
			5.3.6.3 Example 2
			5.3.6.4 Example 3
			5.3.6.5 Example 4
			5.3.6.6 Example 6
			5.3.6.7 Protection Method
		5.3.7 Prospect Theory
			5.3.7.1 A First Approach
			5.3.7.2 The Curves in the Line
			5.3.7.3 The Reference Point
			5.3.7.4 The Model of Prospect Theory
			5.3.7.5 The Model in Practice
	5.4 The Positive Feedback Trading Theory
		5.4.1 A Case Study
		5.4.2 The Positive Feedback Trading Model
	5.5 Summary
	References
6 Investor Risk Perceptions and Investments: Recent Developments
	6.1 Introduction
	6.2 A General Overview
		6.2.1 Frequency of Financial Shock Events and the Awareness of Investors
		6.2.2 Expectations of Tail Risk Events
		6.2.3 Change Drivers in Risk Strategy
	6.3 Germany and Austria
		6.3.1 Institutional Asset Owners
			6.3.1.1 Before the Crisis
			6.3.1.2 During the Crisis
			6.3.1.3 The Years Directly After the Crisis
			6.3.1.4 Early 2014
		6.3.2 Third Party Distribution
			6.3.2.1 Before the Crisis
			6.3.2.2 During the Crisis
			6.3.2.3 The Years Directly After the Crisis
			6.3.2.4 Early 2014
	6.4 Switzerland
		6.4.1 Institutional Asset Owners
			6.4.1.1 Before the Crisis
			6.4.1.2 During the Crisis
			6.4.1.3 The Years Directly After the Crisis
			6.4.1.4 Early 2014
		6.4.2 Third Party Distribution
			6.4.2.1 Before the Crisis
			6.4.2.2 During the Crisis
			6.4.2.3 The Years Directly After the Crisis
			6.4.2.4 Early 2014
	6.5 United Kingdom
		6.5.1 Institutional Asset Owners
			6.5.1.1 Before the Crisis
			6.5.1.2 During the Crisis
			6.5.1.3 The Years Directly After the Crisis
			6.5.1.4 Early 2014
		6.5.2 Third Party Distribution
			6.5.2.1 Before the Crisis
			6.5.2.2 During the Crisis
			6.5.2.3 The Years Directly After the Crisis
			6.5.2.4 Early 2014
	6.6 Ireland
		6.6.1 Institutional Asset Owners
			6.6.1.1 Before the Crisis
			6.6.1.2 During the Crisis
			6.6.1.3 The Years Directly After the Crisis
			6.6.1.4 Early 2014
		6.6.2 Third Party Distribution
			6.6.2.1 Before the Crisis
			6.6.2.2 During the Crisis
			6.6.2.3 The Years Directly After the Crisis
			6.6.2.4 Early 2014
	6.7 Italy
		6.7.1 Institutional Asset Owners
			6.7.1.1 Before the Crisis
			6.7.1.2 During the Crisis
			6.7.1.3 The Years Directly After the Crisis
			6.7.1.4 Early 2014
		6.7.2 Third Party Distribution
			6.7.2.1 Before the Crisis
			6.7.2.2 During the Crisis
			6.7.2.3 The Years Directly After the Crisis
			6.7.2.4 Early 2014
	6.8 Nordic Region
		6.8.1 Institutional Asset Owners
			6.8.1.1 Before the Crisis
			6.8.1.2 During the Crisis
			6.8.1.3 The Years Directly After the Crisis
			6.8.1.4 Early 2014
		6.8.2 Third Party Distribution
			6.8.2.1 Before the Crisis
			6.8.2.2 During the Crisis
			6.8.2.3 The Years Directly After the Crisis
			6.8.2.4 Early 2014
	6.9 Benelux Region
		6.9.1 Institutional Asset Owners
			6.9.1.1 Before the Crisis
			6.9.1.2 During the Crisis
			6.9.1.3 The Years Directly After the Crisis
			6.9.1.4 Early 2014
		6.9.2 Third Party Distribution
			6.9.2.1 Before the Crisis
			6.9.2.2 During the Crisis
			6.9.2.3 The Years Directly After the Crisis
			6.9.2.4 Early 2014
	6.10 France
		6.10.1 Institutional Asset Owners
			6.10.1.1 Before the Crisis
			6.10.1.2 During the Crisis
			6.10.1.3 The Years Directly After the Crisis
			6.10.1.4 Early 2014
		6.10.2 Third Party Distribution
			6.10.2.1 Before the Crisis
			6.10.2.2 During the Crisis
			6.10.2.3 The Years Directly After the Crisis
			6.10.2.4 Early 2014
	6.11 Middle East and North Africa
		6.11.1 Institutional Asset Owners
			6.11.1.1 Before the Crisis
			6.11.1.2 During the Crisis
			6.11.1.3 The Years Directly After the Crisis
			6.11.1.4 Early 2014
		6.11.2 Third Party Distribution
			6.11.2.1 Before the Crisis
			6.11.2.2 During the Crisis
			6.11.2.3 The Years Directly After the Crisis
			6.11.2.4 Early 2014
	6.12 Central Banks
		6.12.1 Before the Crisis
		6.12.2 During the Crisis
		6.12.3 The Years Directly After the Crisis
		6.12.4 Early 2014
	6.13 Summary
	References
About the Authors
Index
                        

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