Market efficiency and investment strategies
Measuring portfolio returns
Readings for the topic of portfolio performance measurement: · Institutional background (investment funds): BKM chapter 4 · Indices: BKM 2.4
· Returns and portfolio performance measures:
o BKM chapter 24 (main reference for this part of the course). o Blake can also be used on all this: sec 3.5 then chapters 14 (descriptive background on the investment process, can ignore 14.3.2, and 14.4.2, 14.4.3 which are mostly concerned with bond portfolios) and 15 (performance measures as such).
For reference: another alternative to BKM is Sharpe, Alexander and Bailey, Investments, chapter 24 (as BKM, weirdly) [HG4521 SHA].
Note that the M2 measure is not covered in Blake while the Fama decomposition model is not covered in BKM (though there’s a similar decomposition). Q1
Read the FT article supplied “The real questions about market efficiency” and be ready to give a short discussion of the key points (a bulleted list of the main points should do).
Answer the following questions along the way:
· Col. 1, 2nd para. - What is meant by “correct levels”? · Col. 2, 1st para. – Interpret “Almost no reliable tools exist for detecting the difference between efficient and inefficient prices”
· Col 4, beg. of 2nd para. - What is “market timing”? Interpret Shiller’s finding and the investment strategy that is suggested.
· Last two cols. - carefully review implications for investors. Q2
“If markets are efficient, there is no need for investment advisors. Selecting securities by throwing darts at the financial pages of a newspaper will be just as effective - and