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strategies in a world of
efficient market :
Market Timing.
Security selection .
Market efficiency
prevails
When many investors are willing to depart
from a passive strategy of efficient
diversification by identifying undervalued
Securities to earn abnormal return .
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Why do exceptional
managers appear to
earn
1. Luck .abnormal returns ;
2. Abnormal returns are so small . It is not
possible to determine whether or not there is
abnormal returns .
3. Some managers take advantage of anomalies
such as the end of year effect , that are
persistent enough to make abnormal returns .
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Objectives of active
portfolio
An optimal portfolio is one that maximizes the
return to volatility ratio, or expected excess
returns divided by the standard deviation of the
portfolio . Clients evaluate managers by this
criterion , which is the sharpe measure .
Sp = E(Rp) Rf divided by SD of P
The most able manager is the one with the
highest sharpe measure .
Sharpe measure
Used to evaluate mutual fund performance ,
and is widely used to evaluate the professional
portfolio managers . It measures the excess
returns of the portfolio over the risk free rate
per unit of risk as measured by the SD of the
portfolio .
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Market Timing ( MT )
Market Timing is asset allocation , in which
the investment will increase if one forecasts
that the market will outperform the T-Bills .
The return on the perfect timing strategy can
never be less than the risk free return . Thus,
SD is not an appropriate measure of risk .
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CAL
CML
E(r)
P
Rf
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