15.433INVESTMENTS Class20:Active Portfolio Management
Spring2003
Financial instruments are increasing in number and complexity
Supranationals
Interest rate-options
Cross-currency hedges
Currency-Currency-
forwards options Agencies
Agencies Proxy hedges
Complex domestic markets Government Futures
Futures
Index-linked bonds
Semigovernments Swaps
Swaps
Vola ili y op ions Agencies Inflat ion prot ect ed
Agencies
Supranationals
Supranationals government bonds
Swaptions
CDO / MBA
Exot ic currency opt ions
Key question for every investor
What is the goal for the total portfolio?
What is the time frame for achieving that goal?
What is the tolerance for loss/uncertainty within a shorter term(one-, three-,six-month)period?
Which kinds of risk are acceptable/unacceptable?
What are you willing to pay for active risk management?(e.g.cur -rency hedges)
How do you monitor/evaluate your risk management?
The risk-versus-return compass Increasing compensated risks can increase returns
active下载Two major types of compensated risk:
•Credit
•Market
Are these areas of”skill”?
Optimize the risk exposure
Insufficient evidence of”skill”?
Ignore,hedge or transfer the risk?
Same Risk
More Return
Less Risk More Risk
Same Return Same Return
Same Risk
Less Return
Higher Moments of Asset
Asset−→Return−→Risk
∂(asset)
=return change in value of asset ∂∆
∂(return)=risk speed of change ∂∆
∂(risk)=higher moments of risk profile of speed
∂∆
Active vs.Passive management
Active management means allocation of resources based on an active strategy.Usually active management is performed against a benchmark, requiring intended over-/underweights of positions.
Passive management means following an index,benchmark or another portfolio using quantitative techniques,such as principal component analysis to replicate an index.
The discussion of active vs passive management is linked to the effi-cient market discussion:Can information add value(performance).
Allocation
Tactical Asset
Allocation
Stock Picking
Figure3:p down approach

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