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M square = E(optimal risky portfolio) - E(market)
Calculate return from interest rate: use real exchange rate * (1 +
r(f))(1+r(d))note: use real exchange rateReal exchange rate = S * Price
foreign / Price domqestic
The client's risk aversion will remain unchanged next year, which
suggests that the percentage allocated to cash will not change. A higher
market return suggests greater weight should be placed on the passively
managed portfolio, especially in light of Keene's prediction that
markets will move closer to equilibrium. Less emphasis is placed on
active management as markets move toward equilibrium (alphas move closer
to zero).
determine asset allocationThe CML is derived by drawing a tangent line
from the intercept point on the efficient frontier to the point where
the expected return equals the risk-free rate of return. Since the
horizontal value is SDV -> value E(R) based on total risk
If the real rate remains constant, the change in the exchange rate
will simply reflect the inflation differential.FXexpected = FXcurrent *
(1 − inflation differential)The expected DC return on the bond should be
approximately equal to the FC return minus the FC depreciation.DCreturn
= FCreturn − FCdepreciation
1. Intercept:- Macro: expected return- Fundamental: no econ
interpretation2. Sensitivities:- Macro: estimated- Fundamental:
calculated from the attributes data 3. Number of factors:- Macro: not
many- Fundamental: usually a lot4. Factors:- Macro: surprises-Fund:
rates of returns associated w each factor (P/E, size, etc.), estimated
using regression
No economic interpretationJust the regression intercept necessary to make the unsystematic risk of the asset equal to 0 (?)
1. active factor: Risk from active factor tilts attributable to
deviations of the portfolio's factor sensitivities versus the
benchmark's sensitivities to the same set of factors.2. active specific
risk: Risk from active asset selection attributable to deviations of the
portfolio's individual asset weightings versus the benchmark's
individual assetweightings, after controlling for differences in factor
sensitivities of the portfolioversus the benchmark.
the return difference between low and high P/E stocks
Regress asset return on single factor: the return on the market portfolio
