Dynamic Portfolio Analysis

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  • Topic: BlackRock, Modern portfolio theory, Arithmetic mean
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t E R al i/ en N nu ozz rd em IN n b a W h a Fa aw L E nag t in y a 10 e v T I C M st le R io rn s A tfol be cob S T or Ja B E of P l na ur Jo

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Investment Insights
The InvesTmenT ReseARch JouRnAl from blackrock

march 2009 | volume 12 Issue 1

3.09

Dynamic Portfolio Analysis
by richard Grinold

Investment Insights
Barclays Global Investors is now BlackRock. BlackRock is pleased to provide these research insights to you. They were originally produced by Barclays Global Investors prior to our merger in 2009.

ExECUTIvE EDIToRS
Ronald N. Kahn
415 670 2266 phone 415 618 1514 facsimile ron.kahn@blackrock.com

AUThoR
RIChARd GRINoLd
Global Head of Research

Russ Koesterich
415 670 2576 phone 415 618 1875 facsimile russ.koesterich@blackrock.com

EDIToR
Marcia Roitberg
850 893 8586 phone 415 618 1455 facsimile marcia.roitberg@blackrock.com

Richard Grinold leads the Advanced Strategies & Research Group, which is responsible for the development of BGI’s value-added strategies in the asset allocation, equity, and fixed income areas. Prior to joining BGI, Richard spent 14 years at BARRA, where he served as director of research, executive vice president, and president. Richard is widely known in the industry for his pioneering work in risk models, portfolio optimization, international investing, and quantitative approaches to active management. Richard also spent 20 years on the faculty of the University of California, Berkeley, where he served as the chairman of the finance faculty, chairman of the management science faculty, and director of the Berkeley program in finance. Richard received a BS in physics from Tufts University, and an MS and PhD in operations research from the University of California, Berkeley. he served as navigator of the USS Gainard (DD-706), and helped wire up the harvard-MIT-Cambridge Electron Accelerator.

Dynamic Portfolio Analysis
TABLE OF CONTENTS
Executive summary.......................................................................................................................................... 2 1. Introduction ............................................................................................................................................................... 3 2. The laws of motion .............................................................................................................................................. 4 3. Stock and flow......................................................................................................................................................... 6 4. Model and portfolio characteristics........................................................................................................... 6 5. Optimality... ............................................................................................................................................................... 9 6. Dynamic portfolio analysis ............................................................................................................................12 7. Summary.. ................................................................................................................................................................16

References................................................................................................................................................................17

Investment Insights

1

Executive summary
A long-short investment strategy is analyzed from the dynamic perspective using a simple two-parameter structure. The parameters measure the rate of information flow and the rate of trading in the portfolio. This setup yields a rich array of results that explain the implementation efficiency of the strategy as well as the balance between the cost of trading and the benefits of trading. More significantly, it establishes a link between cause and effect. These notions can be used to...
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