CFA三级强化班培训项目：Behavioral Finance

Financeп㓝ฯ䇣亯ⴤ䇨ᐾφIIISessionContentStudySessionStudySession3StudySession4StudySession5StudySession6StudySessionStudyStudySessionStudySessionStudySessionStudySession16&PROFESSIONAL(1)&(2)BEHAVIORALFINANCEMARKETɋɌINPORTFOLIOMANAGEMENTMANAGEMENTɋɌFIXED-INCOMEPORTFOLIOMANAGEMENTPORTFOLIOMANAGEMENTINVESTMENTSPORTFOLIOMANAGEMENTɋɌMANAGEMENTɋɌPORTFOLIOMANAGEMENTFORɋɌTRADING,PERFORMANCEMANAGERɋɌPORTFOLIOMANAGEMENTRISKMANAGEMENTɋɌ¾SS3:zR7TheFinancezR8TheBiasesofIndividualszR9FinanceandProcesses7Decision–&zatall&zofofrisks–RationalityAssumes:Assumes:onzonzoror&zas„„„zaasof.ofaszzaasaorasorztheazzreturn.ofonutility.aoraazztoanoraaofofaataloss.8Individuals2007AM2008AM2011AM2012AMbiasesasoforalloroninformationrationallackcapacityorinformationso.zbias.orzbias.orlookororzbias.onBelieferrorszillusionorofazHindsightbias.aaszadjustment.ofaaanorprocessingerrorszbias.ofonto.zbias.aaquestionbasedonthewhichiszbias.aaoforaofanonbiasesofaofasorzzbias.asAofonbias.ofzPredictionCertaintyofzSelf-attributionbias,ofself-protectingbias,allonorbias.ofofaofself-anofbias.anofaartlookzzzzbias.anaaatbias.oftryofassetmadetobiasesoraccommodatethem.Goals-based¾Lookingtheportfolioifitathebottomofthepyramidisconstructedandiscomprisedofassets&&designatedtomeetmostimportantgoals.Oncethisfoundationisconstructed,themovestothesuccessivemoveupthepyramidconsistsofincreasinglyriskyassetsusedtomeetlessandlessimportgoals.„thewealthiertheclient,themoreherbiasescanbeaccommodated.„cognitiveshouldbeandemotionalbiasesshouldbeaccommodated.¾Althoughfromefficientfrontierperspectivetheportfolioprobablywon'tendupefficient,itwilltobefairlywelldiversified.„Theclient'swealthshouldbedeterminedbyconsideringtoThelowertheclient'soflivingrisk,thetheclient'seffectiveandthetheabilitytoaccommodatebiases.aEmotional•changes•changesof•5to10%assetclass•10to15%assetclassriskLow•noof•changes•0to3%assetclass•5to10%assetclassrisk„Emotionalbiasesoftenaccommodatedtherationalassetallocation.„therational„Theemotionalbiasesofthelower-wealthindividualaboutthesameasthebiasesoftheindividual.„Theamountofalsobythenumberofassetclassesthe„Thetherationalassetallocation,thethetothebiases.zDuetosignificantofthebiasesofthelow-wealthbe20182018--GuidelineAnswer:Question4-C„hasahighoflivingrisk.Andherquestionnairethatherpotentialbiasis„BeechprovidesJohnwithamean-varianceoptimizedportfolio.Basedonoflivingriskandhispotentialbias,Beechalsoproducesamodifiedportfolio.Theassetclassweightsofthemodifiedportfoliodifferthoseoftheoptimizedportfolioby+/о10%.Beechthentheprocesspreparingbothamean-varianceoptimizedportfolioandamodifiedportfolio.Determinetheamountbywhichtheassetclassweightsofportfolioswill(circleone)lessthan+/о10%equalto+/о10%than+/о10%Justifyresponse.20182018--GuidelineAnswer:Question4-C„Thedecisiontooradapttoaclient’sbiasesdependsontwofactors:theoflivingrisk/levelofwealth(highorlow)andthetypeofbias(emotionalorcognitive).„withahighoflivingrisk,isriskoffailingtoachievehergoals,soherbehaviorallymodifiedportfolioshouldbeclosertoamean-varianceoptimizedInaddition,becauseheriscognitiveinformationcanhelptocorrectit(i.e.,moderatingthebiasismoretobesuccessful).Assuch,withtheappropriateeducation,shouldbeabletoherbehaviorandaportfoliothatmorecloselymatchesarational(mean-varianceoptimized)allocation.Thiswouldleadtoaportfoliowithlessthana+/о10%differenceinherassetclassweightstotherationalallocation.9¾Developedin1987andclassifiesintoonlytwotypes:passiveandactive.zPassivethosewhonothadtorisktheirowntowealth.theymightwealththroughlong,employmentanddisciplinedsavingorthroughinheritance.Asaresultofaccumulatingwealththeytobemoreriskandaneedforsecuritythantheir"active"counterparts.zActiverisktheirowntowealthandusuallyactiveroleintheirownActivemuchlessriskthanpassiveandwillingtogiveupsecuritycontrolovertheirownwealthcreation.BB&K1¾Developedin1986,classifiesalongtwodimensionsaccordingtohowtheyapproachlifeingeneral.¾Thedimension,confidence,identifiesthelevelofconfidenceusuallywhentheindividualdecisions.Confidencelevelcanrangefromconfidenttoanxious.¾Theseconddimension,methodofaction,measurestheindividualsapproachtodecisionmaking.fromcarefultoimpetuous.ConfidentImpetuousStraightarrowBB&K2„Confidentandimpetuous.„hold„Confidentand„toowndecisionsaftercarefulanalysis.portfolios.„tochances.„toowndecisions.„to„finddifficulttowork„Goodworkbecauseandprocessinformation„„confidentnoranxious.„carefulnotimpetuous.„torisk„and„Concernedwiththefutureandassets.„theadviceofsomeoneasthanCelebrityreturn.„Anxiousandimpetuous.„opinionsbut„andadviceaboutGeneraltypePassiveActiveRiskHighConservativeAggressiveBiastypesCognitiveCognitivePassive(PP)FriendlyFollower(FF)Individualist(II)IndependentActiveAccumulator(AA)biasCognitivebiasquoOverconfidenceself-attributionHindsightConservatismofandConfirmationRisktoleranceDecisionmakingLow¾oninofzasaszaszasAdateaofon¾NaivediversificationasamongofzAccordingaastockandbondallocated50/50.astockandbalancedallocated50/50.zconditionalnaivediversification.asmallernumberofandallocatecasesomemotivatedavoidamountsofnotmiss¾concentrationinemployerstockveryriskyasretirementperformancenowcompensationatancouldonfamiliarityandoverconfidence.zEmployeesmay"Iknowcompanyandeveryagood¾pastperformancehasgoodandyouarethatwouldnaiveextrapolationofpastresults.Framingandstatusquoeffectofmatchingcontributionsasemployer'scontributionmadeemployerstock.zsuchcasesemployeesincreaseamountchoseplaceemployerstock.Loyaltyeffectaholdemployerstockasaof¾Whenfinancialincentivesareemployeremployerstock,mayareofwhatcan¾ofofzasorselfselectionasatzadispositioninon¾¾aaazasof¾Inonlow-risk,ztopofoforztopofofof9ofasworkof9ofandBehavioralFinancebiasesthat¾asaofanofzIllusionofknowledgebias„asoion„atsg"oavioatao.zIllusionofcontrolbiasallor„yeormationsaadorallAydokasaofof„z,anseaofaonweaalit)oo.zbilitybisayudebiasesinodt.„Theconfirmationbiasconfirmingevidence)informationasconfirmationofanoriginalforecast.zuazHindsightbiaszon„Thegambler'sfallacy,terms,thatalong-meanmorethanactuallyhappens.„Arepresentativebiasoneanalystinaccuratelypastdata„investmentdecisionsmadeinagroupsetting„Socialproofbiasiswhenapersonfollowsthebeliefsofagroup(i.e.,groupthink).hasshownthattheinvestmentdecisionmakingprocessinagroupsettingisnotoriously„typicallycomprisedofpeoplewithsimilarbackgroundsand,thus,theyapproachproblemsinthesame„TheremedyisforcommitteestothefollowingzComprisedofindividualswithdiversebackgrounds.zMemberswhonottotheiropinionsifitdiffersfromothers.zAcommitteechairwhoencouragesmemberstospeakoutevenifthemember'sviewscontrarytothegroup'sviews.zAmutualrespectallmembersofthegroup.BehavioralFinanceandBehavior„Inefficientable„Onceisitfullyprices.„ainmispricinganomalMomentum„Aiswithamomentumeffect.whichitbecomeswithmean.„Herdingisininthem.zavailabilitybias(a.k.a.biasandof„isisa.thinkingaparticularleadinfuelsaFinancial„periodsselling,economic„AisperiodpriceszAainpricesaperiodmuch-Biases¾Theredifferenttypesofbehaviorthatevidentduringbubbles.zusuallyexhibitoverconfidence,leadingtotradingandunderestimatingtheriskinvolved.zOverconfidenceistotheconfirmationbias,inwhichlookevidencethatconfirmstheirbeliefsandignoreevidencethatcontradictstheirbeliefs.zSelfattributionbiasisalsopresentwhenpersonalcreditthesuccessoftheirzHindsightbiasispresentwhenthelookshackwhathappenedandknewitallalong."zRegretaversionispresentwhendoesnottomissingoutonalltheeveryoneelseseemstobeenjoying.zThedispositioniswhenmorewillingtosellwinnersandholdontolosers,leadingtothetradingofwinningstocks.¾Asthebubbleunwindsintheearlyanchoredtotheirbeliefs,causingthemtounder-reactbecausetheyunwillingtoacceptlosses.Astheunwindingcontinues,thedispositiondominatesholdontolosingstocksinefforttopostpone¾stockslowprice-to-earningsratios,highbook-to-marketandlowprice-to-dividendratios,withgrowththeopposite¾andfoundthatzstockshistoricallyoutperformedstocks;zsmall-capitalizationstocksoutperformedlarge-caps.Bias¾Haloeffect,thecompanyintothinkingthatthestockisagoodzThisis-aformofrepresentativenessinwhichperformanceintofuturereturns,leadingstockstobecomeovervalued.¾Thehomebiasonetheircomparedtocountries.tocompaniesthatclosertothe)onofonlessheldbyideasmightlimitperformance.࣑θ㙂уՐഖѰ⎾ᶷ⊿⋜ڒ└уࢃȾ䰤从ਃ侾¾ྸ᷒ᛞ䇚Ѱ䠇ぁ䈴ぁ䇨ѿ从ᓉ㿼仇ᡌެԌ䍺ᯏѣᆎ൞䭏䈥θ⅘䘄ᛞ઀䇿ᡇԢθᡶᴿᨆӚⲺ޻ᇯᡇԢՐ൞ᴶᘡᰬ䰪޻Ṯḛᒬ㔏фㆊགྷȾ¾ྸ֋઀䇿ᡇԢϋzሼᛞਇ⧦Ⲻ䰤从䙐䗽⭫ᆆ䛤Ԭ઀⸛ᡇԢθޭ։Ⲻ޻ᇯऻ੡φ9ᛞⲺဉ੃ᡌ㖇ṗ䍜ਭ9ᡶ൞⨣㓝δж㓝䮵㓵ᰖᘝ⨣ε9䰤从ᡶ൞〇ⴤδ㤛ᵠ⸛〇ⴤθ䈭ᨆבㄖ㢸Ƚ⸛䇼⛯εૂ享⸷9ᛞሯ䰤从Ⲻ䈜㓼ᨅ䘦ૂᛞⲺ㿷䀙z䈭ਇ䘷⭫ᆆ䛤Ԭ㠩φacademic.support@¾䶔ᑮ᝕䉘ᛞሯ䠇ぁᮏ㛨Ⲻ᭥ᤷθᛞⲺ∅ж⅗ਃ侾䜳ᱥᡇԢᡆ䮵Ⲻ࣑ࣞȾᡇԢҕሼᔶ䙐ެԌ䰤从ਃ侾⑖䚉δྸᗤؗㅿεȾandп㓝ฯ䇣亯ⴤ䇨ᐾφ1-73IIISessionContentStudySessionStudySession3StudySession4StudySession5StudySession6StudySessionStudyStudySessionStudySessionStudySessionStudySession15Study&PROFESSIONAL(1)&(2)MARKETɋɌASSETANDDECISIONSINPORTFOLIOMANAGEMENTMANAGEMENTɋɌPORTFOLIOMANAGEMENT(1)&(2)PORTFOLIOMANAGEMENTFORPORTFOLIOMANAGEMENTɋɌMANAGEMENT(1)&(2)ɋɌPORTFOLIOMANAGEMENTFORɋɌTRADING,PERFORMANCEMANAGERɋɌINPORTFOLIOMANAGEMENTRISKMANAGEMENTɋɌ2-73¾SS5:AssetAllocationandRelatedDecisionsinManagementzR12:OverviewofAssetAllocationzR13:PrinciplesofAssetAllocationzR14:AssetAllocationwithConstraintsAssetAllocationandDecisionsinPortfolioManagement3-73124-731.governance2.balanceFramework3.Assetallocationapproaches••Concept•Assetclassspecification•4.asset•Asset••Goalbased5.6.considerations5-73Governance—The¾Purpose:ensurethatthepolicies,procedures,andgovernancestructureseffective.¾by:independentthirdparty¾GoodgovernancezEnsuresthedurabilityorsurvivabilityofthe9Avoiddecision-reversalrisk9Considertheeffectofinvestmentcommitteememberandturnoveronthedurabilityoftheinvestment9personriskzAssuresaccountability6-73sheetaclient2.¾balancesheetzConventional/FinancialassetsandliabilitieszAdditional/Extendedassetsandliabilities9inmakingassetallocationdecisionsbutnotappearonconventionalbalancesheetsAssetsLiabilitiesNetworthFinancialliabilitiesassetsequityassetsoffuturecontributionsShort-termborrowingliabilitiesoffuturesupportNetEconomicnetworth7-73Asset¾toassetallocationzAsset-only:Mean–varianceoptimization(MVO)9focussolelyontheassetsideofthebalancesheetzLiability-relative:Fundingliabilities9providethemoneytoliabilitieswhentheycomedue9Liability-driven(LDI)isinvestmentindustrythatgenerallyencompassesassetallocationthatisfocusedonfundingliabilitieszGoals-based:Achievingthegoals9specifyassetallocationssub-portfolios,eachofwhichisalignedtospecifiedgoalsrangingfromsupportinglifestyleneedstoaspirational9Goals-basedinvesting(GBI)isinvestmentindustrythatencompassestheassetallocationfocusedonaddressinggoals8-73Asset¾Liability-relative:DistinctionsbetweenliabilitiesaninstitutionalandgoalsanindividualzLiabilitiesofinstitutionalobligationsordebts,goals,suchmeetingoraspirationalobjectives,not;zinstitutionalliabilities,suchlifeinsurerobligationsorpensionbenefitobligations,uniforminnatureofasingletype),individual’sgoalsbeandzLiabilitiesofinstitutionalofagiventype(e.g.,thepensionbenefitsowedtonumerousandthroughaveraging,oftenbewithconfidence.Incontrast,individualgoalsnotsubjecttothelawofnumbersand;9-73theliability-relative,3.1AssetAllocationRelationtoBalanceSheetObjectiveUsesAssetOwnerMaximizeLiabilitiesorgoalsnotdefinedand/orsimplicityisimportant„„funds„IndividualnotSharpeacceptablelevelofexplicitlymodelliabilitiesorgoalsAsset-onlySomefoundations,endowmentsvolatilityFundliabilitiesnotmeetingliabilitieshighModelsandquasi-liabilitiesLiability-and„Banks„Definedbenefitpensions„assetsAchievegoalswithspecifiedprobabilitiesofsuccessGoals-basedModelsgoalsIndividual10-73risktoliability-relative,3.2Concepts¾Asset-onlyzPrimarymeasureofrisk:volatilitydeviation)ofportfolioreturnzOtherrisksensitivities:9Riskrelativetobenchmarks:trackingrisk(trackingerror)9Downsiderisk„semi-variance„peak-to-troughmaximumdrawdown„measuresfocusingonthesegmentofthedownside:risk¾Liability-relativezShortfallriskzofcontributionsneededtofundliabilities¾Goal-basedzMaximumacceptableprobabilityofnotachievingagoal11-73e.assetclassesusedtorepresenttoriskdiscusscriteriaasset3.3AssetClass¾CriteriaspecifyingassetclassestheofassetallocationzAssetswithinassetclassshouldberelativelyhomogeneous;zAssetclassesshouldbemutually;zAssetclassesshouldbediversifying;zTheassetclassesagroupshouldupapreponderanceofworldwealth;zAssetclassesinvestmentshouldthecapacitytoabsorbameaningfulproportionofportfolio.12-73¾ExampleszInreviewingafinancialplanbythepreviousnoticesthefollowingassetclassspecifications.9Equity:USequities9Debt:Globalinvestment-gradecorporatebondsand9Derivatives:PrimarilyequitieszThepreviousadviser’sreporttheassetclassreturnsonequityandderivativeshighly.Thereportalsotheassetclassreturnsondebtalowcorrelationwithequityandderivativereturns.¾believesthepreviousadviser’sspecificationdebtisincorrectgiventhat,purposesofassetallocation,assetclassesshouldbe:A.diversifying.B.mutuallyexclusive.C.relativelyhomogeneous.13-73theuseriskinassettheirrelationtoassetclass–based3.4¾Factor-basedassetallocationzModelingusingassetclassestheunitofanalysistoobscurethesensitivitytooverlappingrisk;¾assetallocationzSpecifyriskfactorsandthedesiredtoeachfactor;zDescribeassetclasseswithrespecttotheirsensitivitiestoeachofthe;ztotheriskfactor;zMapbackachoiceofriskinfactorspacetoassetclassspaceimplementation;14-733.4¾Longpositionsinassetspositions)neededtoisolatetherespectiverisksandassociatedreturnzInflation.Goinglongnominalandshortinflation-linkedbondsisolatestheinflationcomponent.zRealInflation-linkedbondsprovideazVIX(ChicagoOptionsExchangeIndex)futuresprovideaimpliedzCreditGoinglonghigh-qualitycreditandshortbondsisolatescreditzGoinglong10+andshortisolatesthedurationbeing15-733.4¾Anadviserisconcernedthattheassetallocationapproachfollowedbyhisclient’spreviousfinancialadviserinoverlapinamongassetclassestheportfolio.hisconcernthepreviousadviser’sassetallocationapproach,heshouldassesshisclient’sportfoliousing:A.ahomogeneousandmutuallyassetclass–basedriskanalysis.B.amultifactorriskmodeltocontrolriskinassetallocation.C.assetclass–basedassetallocationapproachtoconstructadiversifiedportfolio.16-73describetheusetheabaselineinassetallocation¾Globalportfoliosumsallassets(globalstocks,bonds,andsoforth)heldbyandreflectsthebalancingofsupplyanddemandacrossworldzMinimizenon-diversifiableriskzTheportfoliothatthemostefficientuseoftheriskbudgetzAsapointahighlydiversifiedportfoliozinvestmentbiases,suchhome-countrybias¾Globalmarket-valueweightedportfolioshouldconsideredasabaselineassetallocation.17-73asset¾Strategicassetallocation/portfoliozassetallocationthatistobeeffectiveinachievingassetownerinvestmentobjectives,givenhisorherinvestmentconstraintsandrisktolerance,documentedintheinvestmentpolicy¾OptimalassetallocationMaximizeUWfW,Z,assetreturndistribution,ofriskaversion)T0ibychoiceofassetclassweightsZin¦toZ1ii1¾Utilityfunction1zMean-varianceutility:UE(r)OV2pp2¾OptimalallocationtotheriskyassetPrf1Z

()OV218-73asset¾Anadviseriscounselingaclientwhorecentlyinherited€1,200,000andwhohasrisktoleranceʄ=2).Thebelowshowsassetallocations.AssetAllocationExpectedReturn10.00%DeviationofReturnABC20%10%5%7.00%5.25%¾Basedonlyonrisk-adjustedreturnstheassetallocations,whichassetallocationwouldshe19-73asset¾Solution:11UsingtheutilityfunctionUE(r)OV2pE(r)u2uV2p=E(r)V2pppp22Theclient’sutilityAssetAllocationsA,andCfollows:U=10.0%-(20%)=6.0%AU=7.0%-(10%)=6.0%BU=5.25%-(5%)=5.0%CTheclientwouldbeindifferentAandBbasedonlyontheircommonperceivedcertainty-equivalentreturnof6%.20-73i(2).discussimplementing5.¾Spectrum¾influencingtothepassive/activespectrumzinvestments;zScalabilityofactivebeingconsidered;zThefeasibilityofinvestingpassivelywhileincorporatingclient-specificconstraints(e.g.ESGzBeliefsconcerninginformationalefficiency;zThetrade-offofincrementalbenefitsrelativetoincrementalcostsandrisksofactivechoices;z;21-73discussinassetallocations¾Rebalancingisthedisciplineofadjustingportfolioweightstomorecloselyalignwiththeassetallocation.¾torebalancingzCalendarrebalancing:onaperiodicbasiszrebalancing9pointsorRebalancingrangecorridor)¾theportfoliovaluedzThemorefrequentthemonitoring,thetheprecisioninimplementation22-73¾FullypartiallycorrectingzRebalancebacktoweightszRebalancetorangeedgezRebalancebetweentherange-edgetriggerpointandtheweight23-73¾affectingtheoptimalwidthassetclass(WithoutweighingandbenefitsinthezPositivelytooptimalcorridorwidth9costs:Hightransactioncostssetahighhurdlerebalancingbenefitstoovercome.9Risktolerance:Higherrisktolerancemeanslesssensitivitytodivergencesfromtheallocation.9Correlationwiththeoftheportfolio:Whenassetclassesmoveinsync,furtherdivergencefromweightsislesszInverselytooptimalcorridorwidth9Volatilityoftheoftheportfolio:Highervolatilitydivergencesfromtheassetallocationmore9Anassetownvolatility:Highervolatilitydivergencefromtheassetallocationmore24-73¾StrategicconsiderationsConsiderationscostsRisk-aversionRebalancingHighercosts,widerMore,narrowergco,naors,furthdivergencefromislessyAssetclasscorrelationBeliefsinmomentummeannBlieinmomntum,widranges;Meanreversion,nrroIlliquidnvestmentscomplicaterebalancing,commonlywiderrangesLiquiditytilityHighervolatilitydivergencesfromtheassetallocationmorethusnarrowerrangesEncourageasymmetricandwiderrebalancingranges,25%->(24%,28%)25-731726-731.asset-onlyassetallocationsFramework•••of•Addressingtheof„„„„Add•Factor-BasedAsset2.assetallocation•Surplus••Asset-LiabilityApproach3.goals-basedassetallocations4.andotherapproaches5.budgetingand27-73¾threesetsofinputs:returns,risksdeviations),andwisecorrelationstheassetsintheopportunityset,andtheobjectivefunctionfollows:UE)OV2mmm¾Theresomeissuestoconsider:zNon-constraintvsnonegativeweights;9Thesimplestoptimizationplacesnoconstraintsonassetclassweightsthebudgetconstraintthatweightssumto1.9Thenon-negativityconstraintleadstocorner-portfolioEzOnlyriskyassetvsseparatingoutcashandcashequivalentasset(non-constraint).9Cashisriskyassetїrisky-assetEF9Cashandcashequivalentrisk-freeassetsїlinearEF(CML)28-73¾StrengthszwidelyusedzBasis¾z(assetallocations)highlysensitivetosmallchangesintheinputs;(otherapproaches)zassetallocationstobehighlyconcentratedinasubsettheassetclasses;(otherzconcernedwithassetclassreturnsasandkurtosisthatin(Non-normalzWhileassetallocationsappeardiversifiedassets,ofrisknotbediversified;(Riskbudgeting)znoconnectiontoaffectingliabilityorconsumption;zisasingle-periodframeworkthattrading/rebalancingand29-73¾EfficientFrontierAssetAllocationAreaCase30-73¾EfficientFrontierAssetAllocationExpectedReturnszIncreasedthereturnofAsiaPacificJapanequitiesfrom8.5%to9.0%anddecreasedthereturnofEuropeUKequitiesfrom8.6%to8.1%31-73Criticisms—¾Thereprimaryreasons)practitionerstypicallyapplyadditionalconstraints:zincorporatereal-worldconstraintsintotheoptimizationproblem;zAndtohelpovercomesomeofthepotentialshortcomingsofmean–varianceoptimizationabove(inputinputandhighlyconcentratedallocations).¾:Ifaverynumberofconstraintsimposed,oneisnolongeroptimizingbutspecifyingassetallocationthroughaseriesofbindingconstraints.32-73Criticisms—¾Criticismsincludingthefollowing:zSomefrontiersconcave“bumps”returnriskincreases;zThe“riskier”assetallocationsover-diversified;zTheassetallocationsinherittheintheoriginalinputs;andzTheapproachlacksaFrontierAssetAllocationAreafoundationintheor33-73¾isapowerfulthathelpsexplaintheimpliedreturnsassociatedwithportfolio.Itcanbeusedtoreturnsuseinaforward-lookingoptimization.¾asitsinputsasetassetallocationweightsglobalthatassumedtobeandwithadditionalinputsandtheriskcoefficient,solvesreturns(alsocalledimpliedreturns).¾willfindthelinkbetweenreverseandCAPMequilibriumelegant.zusetheweightswiththeassetclasses(ortoaworkingversiontheglobal;zAnduseeachassetrelativetoversiontheglobalztowhatreturnswouldbeifallassetspricedbytheCAPMtotheirassumearisk-free2.5%andaglobalriskzRunanew34-73Criticisms——BL¾Themodelhashelpedtheframeworkmoreuseful.Itenablestocombinetheiruniqueofreturnswithoptimizedreturnsinzwithreturnsoftherisk-freeproducedfromoptimization;zAndthenprovidesatechniquealteringreverse-optimizedreturnsinsuchathattheyreflectowndistinctiveviews.zAnewisrun.¾Derivingreturnsbyoptimizationorbyoptimizationviewsonassetreturns(themodel)isonemeansofthetendencytoefficientportfoliosthatwelldiversified.¾optimizationandthemodeladdresstheissueofsensitivitytosmalldifferencesinreturnbyanchoringreturnstothoseimpliedbytheassetclassweightsofatheglobal.35-73Criticisms—¾Anormaldistributionisfullyexplainedbythemomentsbecauseandthenormal¾variancedeviationisanrisknormallygo(meanandvariance)ofareturnandmomentsandzSkewnessmeasuresthedegreetowhichreturnasymmetricalzKurtosismeasuresthethicknessofthe(i.e.,frequentlyevents¾Anumberofvariationsthesebeenthemconsiderthenon-normaldistributionanduseadefinitionofrisk,suchas:zMean–semivariancezMean–conditionalvalue-at-riskzMean–variance-skewnesszMean–variance-skewness-kurtosis36-73¾IdentifytheassetinBmighttorelativetoA.zachieveefficientinseveralmightbeenused,Black–Littermanandassetclassweights.37-73Asset-Only:¾Factor-basedassetallocationalsosetsofinputs:returns,risksdeviations),andpair-wisecorrelationstheseintheopportunityset,inordertogetoptimizedsolution.zandmoresophisticatedapproachesthatovercomesomeofthelimitationsorweaknessesofappliedtoopportunitysetconsistingoftraditional,non-overlappingassetclasses.zAnalternativeapproachusedbysomepractitionersistomovefromopportunitysetofassetclassestoopportunitysetconsistingoffactors,orfactor-basedassetallocation.38-73Asset-Only:¾typicallysimilartothefundamentalstructural)inwidelyusedmulti-factormodels.usedinassetallocationincludevaluation,momentum,durationcredit,andvolatility.zReturnscanbecombinedfromshortinglarge-capstocksandgoinglongsmall-capstocks,factorreturn=Small-capstockreturn–stockzdeviationsthevolatilityofreturn.zPair-wisecorrelationswiththewithgenerallyConstructinginthismannerfromthebecauseoftheshortpositionsthatoffsetlongpositions.39-731.9MCS¾Carlobyaddressingtheofasingle-periodframework.¾MCScanhelpa,includingthegoals,thedistributionofthroughtime,andpotentialmaximumdrawdowns.¾Carlocanwithaissuesthatdifficultorimpossibletoz:Inthemulti-periodtheofandlosses.aspecificSAAswillresultinofpayments.z:moneyinandspendmoneyouttheirinmoreispathdependentbecauseoftheofcashflowsandreturns.40-731.asset-onlyassetallocationsFramework•••of•Addressingtheof„„„„Add•Factor-BasedAsset2.assetallocation•Surplus••Asset-LiabilityApproach3.goals-basedassetallocations4.andotherapproaches5.budgetingand41-73¾Itinvolvesadaptingasset-onlymean–varianceoptimizationtoefficientfrontierbasedonthevolatilitysurplussubstitutingsurplusreturnassetreturnovergiventimehorizon,allelseequal.zIsaoftheasset-onlyportfoliomodelzTheobjectivefunctionisUOVE(R)0.0052ms,m(Rs,m)zSurplusReturn=(Changeinasset–Changeinliabilityvalue)/(Initialasset¾ExpectedandvariancesliabilitieszassumethattheliabilitiesthesamereturnsandvolatilitiesUScorporatebonds;zAnalternativeapproachistodeployasetofunderlyingthatdrivethereturnsoftheassets.42-73¾Assetliabilitymanagement(ALM)considerstheallocationofassetswithrespecttoagivenliabilityorsetofliabilities.¾TheALMapproachmaximizethedifference(thesurplus)betweenassetsandliabilitieseachlevelofrisk(muchtheefficientfrontierrepresentsthemaximumreturneachlevelofrisk).43-73¾Thecomparisonbetweenthetwoasset(asset-onlyandsurpluszTheassetverydifferentontheconservativesideofthefrontiers.9ThemostconservativemixthesurplusefficientfrontierconsistsmostlyoftheUScorporatebondbecauseitresultsinthevolatilityofsurplusoverthehorizon.9Incontrast,themostconservativemixtheasset-onlyefficientfrontierconsistschieflyofcash.zThetwoasset(asset-onlyandsurplus)becomesimilartheofriskdecreases,andtheyidenticalforthemostaggressiveportfolioequity).zBondsdisappearfromthefrontieraboutbetweenthemostconser