Its development spans three consecutive decades from s to s namely, the portfolio theory and the single-factor model which are based on the mean-variance efficiency MVE for assets allocation pioneered by Markowitz and simplified by Sharpe, the capital asset pricing model CAPM developed independently by Sharpe, Lintner, and Mossin, and the arbitrage pricing theory APT by Ross. Many subsequent models are either the variants or extensions of the original theory of portfolio selection of Markowitz. However, those models, when put into tests, are not empirically robust and often fail to explain certain market phenomena.
Market timing involves shifting funds between a market-index portfolio and a safe asset such as T-bills or a money market funddepending on whether the market as a whole is expected to outperform the safe asset. In practice, most managers do not shift fully, but partially, between T-bills and the market.
If the weight of the market were constant, say, 0. No market timing, beta is constant 60 If the investor could correctly time the market and shift funds into it in periods when the market does well. If bull and bear markets can be predicted, the investor will shift more into the market when the market is about to go up.
The portfolio beta and the slope of the SCL will be higher when rM is higher, resulting in the curved line. Market timing, beta increases with expected market excess return Such a line can be estimated by adding a squared term to the usual linear index model where rP is the portfolio return, and a, b, and c are estimated by regression analysis.
If c turns out to be positive, we have evidence of timing ability, because this last term will make the characteristic line steeper as rM - rf is larger. A similar and simpler methodology suggests that the beta of the portfolio take only two values a large value if the market is expected to do well and a small value otherwise.
Hence, the beta of the portfolio is b in bear markets and b c in bull markets. Again, a positive value of c implies market timing ability. Performance attribution studies attempt to decompose overall performance into discrete components that may be identified with a particular level of the portfolio selection process.
The difference between a managed portfolios performance and that of a benchmark portfolio then may be expressed as the sum of the contributions to performance of a series of decisions made at the various levels of the portfolio construction process. For example, one common attribution system decomposes performance into 3 components broad asset market allocation choices across equity, fixed-income, and money markets.
Suppose that the universe of assets for P and B includes n asset classes such as equities, bonds, and bills.
For each asset class, a benchmark index portfolio is determined. For example, the SP may be chosen as benchmark for equities. The bogey portfolio is set to have fixed weights in each asset class, and its rate of return is given by where wBi weight of the bogey in asset class i."My essay has a good grammar and shows a complete understanding of a topic.
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