This chapter will first detail some weaknesses of the CAPM that the APT was designed to correct. It will then describe the APT and its evolution as a theory. The final sections of this chapter will deal with the problem of implementation and give some examples
of ways in which people ... click here for more details.
*** From the book ***
The lessons of this chapter are:
* The goal of performance analysis is to separate skill from luck. Cross-sectional comparisons are not up to this job.
* Returns-based performance analysis is the simplest method for analyzing both return and risk, and distinguishing skill from luck.
* Portfolio-based performance analysis ... click here for more details.
***Excerpt from the book***
This chapter will mainly focus on the second question, how to handle less than perfect data. Many of the procedures used in portfolio construction are, in fact, indirect methods of coping with noisy data. With that point of view, we hope to make portfolio construction more efficient ... click here for more details.
Investment management, active portfolio management, performance measurement, information ratio, ex post vs. ex ante, residual frontier, objective of active management, certainty equivalence, residual risk, optimal level of residual risk, risk-adjusted residual return, value added, beta = 1 frontier, forecasting alpha, empirical observations on information ratios, relationship between information ratio and Sharpe ratio
Investment management, active portfolio management, information ratio, fundamental law of active management, strategy breadth, information coefficient, additivity of fundamental law, assumptions of fundamental law, tests of fundamental law, information model, optimal active position
This chapter provides an intuitive explanation of the modern theory of asset valuation, starting with price as a function of discounted certain cash flows and then incorporating uncertainty and demonstrating how valuation is adjusted to account for risk. The chapter is well-written and easy to follow, with the technical ... click here for more details.