The most comprehensive educational resources for finance

What is Information Ratio?

The information ratio is a commonly used risk-adjusted performance measure along with the Sharpe ratio. Even though both Information ratio and Sharpe ratio measure performance as a ratio of returns to the standard deviation in some form, there are some differences. Sharpe ratio is the ratio of excess returns over risk-free returns to the total

Steps in Portfolio Management Process

The investment managers will typically follow the following investment management process to manage a client’s investment portfolio. Planning The first step is planning, which involves understanding the needs of the customer. This involves analysing the investor’s objectives and constraints, and creating an Investment Policy Statement (IPS). Without really understanding investor’s objectives for investing and the

Investment Clients for Portfolio Managers

As a portfolio manager you will be looking after the investment needs of a variety of investment clients whether you are employed by a fund management company or directly contracted by the client. In this article we will describe the key investment clients which can be broadly classified as individuals and institutional investors. Individual Investors

The Portfolio Perspective for Investing

In the world of investments, one of the most important ideas is that of a portfolio. A portfolio simply refers to a mix of an investor’s investments in different asset classes such as equities, bonds, commodities and real estate. We know that the maximum return an investor can earn is by investing all the money

The Investor Policy Statement

The IPS is the document that governs how an investor’s portfolio is managed. Designing an IPS is a critical part of the Planning phase of the portfolio management process. The IPS will bring together an investor’s objectives and constraints (see below) to create a logical investment strategy. Investment Objectives The investment objectives of an IPS

Portfolio Management Process

The Portfolio Perspective In studying the mean-variance analytical foundation created by Harry Markowitz, candidates have come to see how Modern Portfolio Theory emphasizes whole portfolio over its individual pieces. The goal of portfolio management is to build a portfolio of assets with an appropriate risk/return profile for the individual investor (who could be a person

The Treynor-Black Model

Treynor and Black developed a portfolio optimization model that seeks to maximize a portfolio’s Sharpe Ratio through a combination of an actively managed portfolio component built with a few select mispriced securities and a passively managed market index portfolio component. Treynor-Black assumes that markets are highly, but no perfectly efficient. Macroeconomic forecasting can be applied

Justifying Active Portfolio Management

Two arguments can be used to justify active portfolio management for investors: Given that the mispricing of securities takes place from time to time (2007 would have been a great time to short U.S. mortgage backed securities), highly skilled active managers can exploit mispricings to generate excess returns. Even with a passive strategy, an allocation

Impacts of Market Segmentation on ICAPM

The ICAPM is used by some investors to value any and all risky assets on a global basis. The ICAPM is only valid if international capital markets are integrated. If international capital markets are segmented, then assets with the same risk characteristics will be priced differently in different national markets. When barriers to capital market

Moving Exchange Rates and Equity Markets

Two theories attempt to explain the relationship between exchange rates, real economic activity, and equity markets. Traditional Trade Theory This is the traditional view of the J-Curve effect. The value of the domestic currency and the performance of the domestic stock market are positively correlated in the short run but negatively correlated over the long