Lecture 1

Question 1

Strategic asset allocation

Answer 1

Determines the long-term asset allocation by deciding on:
Investment objective, universe and restrictions
Long-term risks & correlation

Question 2

Tactical Asset Allocation

Answer 2

How to deviate from SAA: Betw. or within asset classes?

How to manage risk and return?

Question 3

Process of asset allocation

Answer 3

1: Consider clientele and environment
2: SAA
3: TAA
4: Implementation
5: Performance analysis

Question 4

Problems of active management:

Answer 4

Relies on having superior information to create alpha –> efficient market hypothesis
–> Profits have to cover fees

Question 5

Efficient market hypothesis

Answer 5

New information is unpredictable

Stock prices change in response to new information –> random walk

Question 6

Weak EMH
Semi-strong EMH
Strong EMH

Answer 6

Tech. analysis – Momentum, Correlation
fundamental analysis – Event studies
Insider information – Forbidden by SEC

Question 7

Issues with EMH

Answer 7

Magnitude Issue: Large Portfolios make enough profit at small misspricings (but in and out?)
Selection Bias: Good schemes remain private
Lucky events?
Anomalies: P/E Effect, Small firm effect, liquidity effect, post earnings

Question 8

Resource Allocation Problem

Answer 8

If markets were inefficient, resources would be systematically misallocated

Question 9

Reasons for portfolio management

Answer 9

Diversification, Risk Management, Tax considerations