Discussion Points How to measure returns? How to choose benchmark? How to adjust for risk? Performance attribution. Active return and risk

Introduction Overview of investment styles; Empirical evidence on returns of small capitalization firms and value stocks; How to identify investment styles of a mutual fund Characteristic-based style analysis Return-based style analysis Style benchmarks

INVESTMENTS Fourth Edition Efficient Market Hypothesis (EMHD Do security prices reflect information Why look at market efficiency Implications for business and corporate finance Implications for investment

Arbitrage Pricing Theory Arbitrage-arises if an investor can construct a zero investment portfolio with a sure profit Since no investment is required, an investor can create large positions to secure large levels of profit

Fourth Edition Advantages of the Single Index Model Reduces the number of inputs for diversification. Portfolio of 50 assets 50 expected returns;50 variances 1225 covariance. too difficult a task

INVESTMENTS Two-Security Portfolio: Return rp =W+W2r2 W Proportion of funds in Security 1 W2 Proportion of funds in Security 2 =Expected return on Security 1

Capital allocation The choice of proportion in safe asset and proportion in risky asset; Most institutional investors follows top- down analysis---The first part is asset allocation and the next part is security selection decision

INVESTMENTS h Ealiti Risky Investments with Risk-Free Irrvestrent

Course overview The focus of this course is on financial theory and empirical evidence that are useful for investment decisions. The topics include: Financial theory: This include portfolio theory, CAPM, APT, discount factor model, they are important for decision-making in investments;

Types of market efficiency The weak-form of efficiency: price accurately reflect all information that can be derived by examining market trading data such as past prices, trading volume, short interest rate, etc