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ActiveBeta Indexes: Capturing Systematic Sources of Active Equity Returns by Khalid Ghayur, Ronan G. Heaney, Stephen A. Komon, Stephen C. Platt, and Andrew W. Lo. Copyright © 2010 by Khalid Ghayur, Ronan G. Heaney, Stephen A. Komon, and Stephen C. Platt. Reproduced with permission of John Wiley & Sons, Inc.

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ISBN 978-1-118-91232-4 (Paperback)
ISBN 978-1-118-91241-6 (ePDF)
ISBN 978-1-118-91234-8 (ePub)

CONTENTS

Acknowledgments

Introduction

The Purpose of This Textbook
The Layout and Structure of This Textbook
How to Use This Text
The CIMA Content
The CIMA Exams
Additional Resources
Helpful Web Links
Notes

Chapter 1: IMCA Code of Professional Responsibility and Standards of Practice

Part I IMCA Code of Professional Responsibility
Part II IMCA Standards of Practice
Part III IMCA Performance Reporting Standards
Part IV IMCA Disciplinary Rules and Procedures
Part V IMCA Guidelines Regarding the Acceptance of Benefits from Third Parties
Part I IMCA Code of Professional Responsibility
Part II IMCA Standards of Practice
Part III IMCA Performance Reporting Standards
Part IV IMCA Disciplinary Rules and Procedures
Part V IMCA Guidelines for Consultants Regarding the Acceptance of Benefits from Third Parties

Chapter 2: Regulatory Considerations

Direct Relationships
Indirect Relationships
Laws and Regulations
Federal Regulatory Agencies
SEC
Financial Industry Regulatory Authority (FINRA)
State Agencies

Chapter 3: Statistics and Methods

Part I Mathematics and Statistics for Financial Risk Management: Some Basic Math
Part II Mathematics and Statistics for Financial Risk Management: Probabilities
Part III Mathematics and Statistics for Financial Risk Management: Basic Statistics
Part IV Mathematics and Statistics for Financial Risk Management: Distributions
Part V Mathematics and Statistics for Financial Risk Management: Hypothesis Testing and Confidence Intervals
Part VI Mathematics and Statistics for Financial Risk Management: Linear Regression Analysis
Part VII Mathematics and Statistics for Financial Risk Management: Time Series Models
Part I Some Basic Math
Part II Probabilities
Part III Basic Statistics
Part IV Distributions
Part V Hypothesis Testing and Confidence Intervals
Part VI Linear Regression Analysis
Part VII Time Series Models
Note

Chapter 4: Applied Finance and Economics

Section I: Time Value of Money
Part I Foundations and Applications of the Time Value of Money: The Basics of the Time Value of Money
Part II Foundations and Applications of the Time Value of Money: Don't Discount Discounting
Part III Foundations and Applications of the Time Value of Money: Cash Happens
Part IV Foundations and Applications of the Time Value of Money: Yielding for Yields
Part V Foundations and Applications of the Time Value of Money: Using Financial Calculators
Part VI Foundations and Applications of the Time Value of Money: Formulas
Section II: Economics
Part I Handbook of Finance: Monetary Policy—How the Fed Sets, Implements, and Measures Policy Choices
Part II The Trader's Guide to Key Economic Indicators: Introduction
Part III The Trader's Guide to Key Economic Indicators: Gross Domestic Product
Part IV The Trader's Guide to Key Economic Indicators: Indexes of Leading, Lagging, and Coincident Indictors
Section I: Time Value of Money
Part I The Basics of the Time Value of Money
Note
Part II Don't Discount Discounting
Discounting More Than One Future Value
Determining the Number of Compounding Periods
Summary
“Try It!” Solutions
Notes
Part III Cash Happens
Notes
Part IV Yielding for Yields
Notes
Part V Using Financial Calculators
Troubleshooting Problems
Notes
Part VI Formulas
Section II: Economics
Part I Monetary Policy: How the Fed Sets, Implements, and Measures Policy Choices
Summary
References
Part II Introduction to Key Economic Indicators
The Business Cycle
Part III Gross Domestic Product
What Does It All Mean?
Tricks from the Trenches
References
Part IV Indexes of Leading, Lagging, and Coincident Indicators
Evolution of an Indicator
Digging for the Data
Lagging Index
What Does It All Mean?
How to Use What You See
Tricks from the Trenches
References

Chapter 5: Global Capital Markets: History and Valuation

Part I Portfolio Design: A Modern Approach to Asset Allocation: Long-Run Returns on Stocks and Bonds
Part II Portfolio Design: A Modern Approach to Asset Allocation: Foreign Stocks
Part III Portfolio Design: A Modern Approach to Asset Allocation: Emerging Markets
Part IV Portfolio Design: A Modern Approach to Asset Allocation: Bonds
Part I Long-Run Returns on Stocks and Bonds
Notes
References
Part II: Foreign Stocks
Notes
References
Part III Emerging Markets
Notes
References
Part IV Bonds
Notes
References

Chapter 6: Attributes of Risk

Part I Handbook of Finance: Risks Associated with Investing
Part II The Handbook of Risk: The Likelihood of Loss
Part I Risks Associated with Investing
References
Part II The Likelihood of Loss
Note

Chapter 7: Risk Measurements

Part I Handbook of Risk: Measuring and Managing Investment Risk
Part II Investments: Principles of Portfolio and Equity Analysis—Portfolio Risk and Return
Part I Measuring and Managing Investment Risk
Part II Portfolio Risk and Return
Notes
References

Chapter 8: Performance Measurement and Attribution

Part I Investments: Principles of Portfolio and Equity Analysis—Portfolio Risk and Return
Part II The Handbook of Risk: Measuring Risk for Asset Allocation, Performance Evaluation, and Risk Control
Part III Handbook of Finance: Introduction to Performance Analysis
Part IV IMCA—(excerpt from) Math for Investment Consultants: Performance Measurement, Analysis, and Attribution
Part I Portfolio Risk and Return
Notes
Part II Measuring Risk for Asset Allocation, Performance Evaluation, and Risk Control
Notes
Part III Introduction to Performance Analysis
References
Part IV Performance Measurement, Analysis, and Attribution

Chapter 9: Traditional Global Investments: Equity and Fixed Income

Part I Investments: Principles of Portfolio and Equity Analysis: Market Organization and Structure
Part II Investments: Principles of Portfolio and Equity Analysis: Overview of Equity Securities
Part III ActiveBeta Indexes: Capturing Systematic Sources of Active Equity Returns: The Evolution of Equity Style Indexes
Part IV Mathematical Finance: Cost of Capital and Ratio Analysis
Part V Investments: Principles of Portfolio and Equity Analysis: Security Market Indices
Part I Market Organization and Structure
Part II Overview of Equity Securities
1. Introduction
2. Equity Securities in Global Financial Markets
3. Types and Characteristics of Equity Securities
4. Private versus Public Equity Securities
5. Investing in Nondomestic Equity Securities
6. Risk and Return Characteristics of Equity Securities
7. Equity Securities and Company Value
8. Summary
Notes
References
Part III The Evolution of Equity Style Indexes
References
Part IV Cost of Capital and Ratio Analysis
Part V Security Market Indices
Reference
Notes

Chapter 10: Fixed-Income Vehicles

Part I Portfolio Design: A Modern Approach to Asset Allocation: Bonds
Part II Handbook of Finance: Bonds: Investment Features and Risks
Part III Handbook of Finance: Effective Duration and Convexity
Part IV Foundations and Applications of the Time Value of Money: Values Tied to Bonds
Part I Bonds
Notes
References
Part II Bonds: Investment Features and Risks
References
Part III Effective Duration and Convexity
References
Part IV Values Tied to Bonds
Notes

Chapter 11: Foreign Exchange Market

Part I Handbook of Finance: An Introduction to Spot Foreign Exchange
Part II Handbook of Finance: Currency Overlay
Part I An Introduction to Spot Foreign Exchange
Part II Currency Overlay
References

Chapter 12: Alternative Investments

Part I Handbook of Finance: Alternative Asset Classes
Part II The New Science of Asset Allocation: Risk Management in a Multi-Asset World: Sources of Risk and Return in Alternative Investments
Part III Portfolio Design: A Modern Approach to Asset Allocation: Hedge Funds
Part IV Portfolio Design: A Modern Approach to Asset Allocation: Asset Allocation with Alternative Investments
Part I Alternative Asset Classes
References
Part II Sources of Risk and Return in Alternative Investments
Notes
References
Part III Hedge Funds
Notes
References
Part IV Asset Allocation with Alternative Investments
Notes
References

Chapter 13: Options, Futures, and Other Derivatives

Part I The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies: Fundamentals of Equity Derivatives
Part II The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies: Using Equity Derivatives in Portfolio Management
Part I Fundamentals of Equity Derivatives
Part II Using Equity Derivatives in Portfolio Management
Notes

Chapter 14: Tools and Strategies Based on Technical Analysis

Investments: Principles of Portfolio and Equity Analysis: Technical Analysis
Technical Analysis
References
Notes

Chapter 15: Portfolio Theories and Models

Part I The New Science of Asset Allocation: A Brief History of Asset Allocation
Part II Investments: Principles of Portfolio and Equity Analysis: Market Efficiency
Part III Investments: Principles of Portfolio and Equity Analysis: Portfolio Risk and Return
Part IV The Handbook of Finance: Asset Pricing Models
Part I A Brief History of Asset Allocation
References
Part II Market Efficiency
Summary
References
Part III Portfolio Risk and Return
Part IV Asset Pricing Models
References
Notes

Chapter 16: Behavioral Finance Theory

Behavioral Finance and Wealth Management: Behavioral Finance
Behavioral Finance
Notes
References

Chapter 17: Client Discovery

Part I Investments: Principles of Portfolio and Equity Analysis: Portfolio Management: An Overview
Part II Strategic Risk Management: Strategic Asset Allocation
Part III Strategic Risk Management: Active versus Passive Management
Part IV The New Science of Asset Allocation: Risk Management in a Multi-Asset World: Strategic, Tactical, and Dynamic Asset Allocation
Part V New Science of Asset Allocation: Risk Management in a Multi-Asset World: Core and Satellite Investment
Part VI Financial Advice and Investment Decisions: A Manifesto for Change: Tax Efficient Investing
Part I Portfolio Management: An Overview
Reference
Part II Strategic Asset Allocation
References
Part III Active versus Passive Management
References
Part IV Strategic, Tactical, and Dynamic Asset Allocation
Notes
References
Part V Core and Satellite Investment
Notes
References
Part VI Tax Efficient Investing
References
Notes

Chapter 18: Investment Policy Statement (IPS)

Investments: Basics of Portfolio Planning and Construction
Basics of Portfolio Planning and Construction
References
Notes

Chapter 19: Portfolio Risk Management Strategies

Part I The New Science of Asset Allocation: Risk Budgeting and Asset Allocation
Part II Article from Wilmott Magazine: “Dynamic Risk-Based Asset Allocation”
Part III Portfolio Design: Investing and Spending in Retirement
Part I Risk Budgeting and Asset Allocation
Notes
References
Part II Dynamic Risk-Based Asset Allocation
References
Part III Investing and Spending in Retirement
Notes
References

Chapter 20: Manager Search, Selection, and Monitoring

Part I Strategic Risk Management: Manager Selection
Part II The New Science of Asset Allocation: Alpha and Beta, and the Search for a True Measure of Manager Value
Part I Manager Selection
References
Part II Alpha and Beta, and the Search for a True Measure of Manager Value
Tracking Alternatives in Alpha Determination
Notes
References

Chapter 21: Perform Portfolio Review and Revisions Process

Part I Portfolio Design: The Discipline of Asset Allocation—Rebalancing
Part II Strategic Risk Management: Execution
Part III Strategic Risk Management: Review and Monitoring
Part I The Discipline of Asset Allocation: Rebalancing
Notes
Part II Execution
Reference
Part III Review and Monitoring

IMCA

About the Author

Index

Advert

Acces Code

EULA

List of Tables

Chapter 3

Table 3.1
Table 3.2

Chapter 4

Table 4.1
Table 4.2
Table 4.3
Table 4.4

Chapter 5

Table 5.1
Table 5.2
Table 5.3
Table 5.4
Table 5.5
Table 5.6
Table 5.7
Table 5.8
Table 5.9
Table 5.10
Table 5.11
Table 5.12
Table 5.13
Table 5.14
Table 5.15
Table 5.16
Table 5.17
Table 5.18
Table 5.19
Table 5.20
Table 5.21
Table 5.22
Table 5.23
Table 5.24

Chapter 7

Table 7.1

Chapter 8

Table 8.1
Table 8.2
Table 8.3
Table 8.4
Table 8.5

Chapter 9

Table 9.1
Table 9.2
Table 9.3
Table 9.4
Table 9.5
Table 9.6
Table 9.7
Table 9.8
Table 9.9
Table 9.10
Table 9.11
Table 9.12
Table 9.13
Table 9.14
Table 9.15
Table 9.16
Table 9.17
Table 9.18
Table 9.19
Table 9.20
Table 9.21
Table 9.22

Chapter 10

Table 10.1
Table 10.2
Table 10.3
Table 10.4
Table 10.5
Table 10.6
Table 10.7
Table 10.8
Table 10.9
Table 10.10
Table 10.11

Chapter 11

Table 11.1

Chapter 12

Table 12.1
Table 12.2
Table 12.3
Table 12.4
Table 12.5
Table 12.6
Table 12.7
Table 12.8
Table 12.9
Table 12.10
Table 12.11
Table 12.12
Table 12.13
Table 12.14
Table 12.15
Table 12.16
Table 12.17
Table 12.18
Table 12.19
Table 12.20
Table 12.21
Table 12.22
Table 12.23
Table 12.24
Table 12.25
Table 12.26
Table 12.27
Table 12.28
Table 12.29
Table 12.30
Table 12.31
Table 12.32
Table 12.33
Table 12.34

Chapter 13

Table 13.1
Table 13.2
Table 13.3
Table 13.4
Table 13.5
Table 13.6
Table 13.7
Table 13.8

Chapter 14

Table 14.1

Chapter 16

Table 16.1
Table 16.2
Table 16.3

Chapter 17

Table 17.1
Table 17.2
Table 17.3
Table 17.4
Table 17.5
Table 17.6
Table 17.7
Table 17.8
Table 17.9
Table 17.10
Table 17.11
Table 17.12
Table 17.13
Table 17.14

Chapter 18

Table 18.1

Chapter 19

Table 19.1
Table 19.2
Table 19.3
Table 19.4

Chapter 20

Table 20.1
Table 20.2
Table 20.3
Table 20.4
Table 20.5
Table 20.6
Table 20.7
Table 20.8

Chapter 21

Table 21.1
Table 21.2
Table 21.3
Table 21.4
Table 21.5

List of Illustrations

Chapter 3

Figure 3.1 Normal Prices
Figure 3.2 Log Prices
Figure 3.3 Positive Skew
Figure 3.4 Negative Skew
Figure 3.5 High Kurtosis
Figure 3.6 Low Kurtosis
Figure 3.7 Normal Distribution Probability Density Function
Figure 3.8 Value at Risk Example
Figure 3.9 Linear Regression Example

Chapter 4

Figure 4.1 Components of the Future Value of $1,000 Invested at 5 Percent for Two Years
Figure 4.2 The Accumulation of Interest and Interest on Interest of a $1,000 Deposit with 6 Percent Compound Annual Interest
Figure 4.3 Future Value of $1,000 at a 6 Percent Interest Rate
Figure 4.4 Growth of $1,000 in an Account with 12 Percent Interest per Year, Compounding Quarterly
Figure 4.5 The Value of $1 Million at 10 Percent Interest, Compounded Annually vs. Continuously
Figure 4.6 Present Value of $1 Million for a Different Number of Discount Periods and Different Discount Rates
Figure 4.7 Present Value of $1 Million for a Different Number of Discount Periods and Different Discount Rates
Figure 4.8 Discounting $10,000 for Five Years for Different Annual Percentage Rates and Different Frequencies of Compounding
Figure 4.9 Effective Interest Rates for 12 Percent APR with Different Frequencies of Compounding
Figure 4.10 Fed Policy Objectives, Indicators (Targets), and Procedures (Guidelines)
Figure 4.11 Sampling of the Federal Reserve's Official Statements of FOMC Actions, First Half of 1994
Figure 4.12 GDP and Highlighted Recessions
Figure 4.13 Composition of GDP
Figure 4.14 Real and Nominal GDP (Y/Y Percent)
Figure 4.15 Personal Consumption Expenditure Deflators (Y/Y percent)
Figure 4.16 Personal Consumption Expenditures
Figure 4.17 Net Exports as a Percentage of GDP
Figure 4.18 Final Sales to Domestic Puchasers
Figure 4.19 After-Tax Corporate Profits (Y/Y Percent) and Payroll Growth
Figure 4.20 Undistributed Profits
Figure 4.21 Actual and Potential GDP
Figure 4.22 Output Gap and Unemployment (Inverted Scale)
Figure 4.23 Output Gap and Effective Fed Fund Rate
Figure 4.24 Changes in the Money Supply (M2) and in Real GDP
Figure 4.25 The Interest Rate Spread and the Coincident Index
Figure 4.26 Index of Coincident Economic Indicators and Real GDP
Figure 4.27 Index of Leading Economic Indicators and Real GDP
Figure 4.28 Coincident-to-Lagging Ratio and Recessions

Chapter 5

Figure 5.1 Comparing Stocks and Bonds, 1951–2009
Figure 5.2 $100,000 Invested for 20 Years in Bonds versus Stocks (in 2009 Dollars)
Figure 5.3 Inflation and Bond Yields, 1954–2009
Figure 5.4 Estimates of Average Real Returns to Equity (Estimates from 1951 to Dates Shown)
Figure 5.5 Price-Earnings Ratios for S&P 500, 1951–2009 (Current Real Price Relative to 10-Year Average Real Earnings)
Figure 5.6 Dividend Yield for S&P 500, 1951–2009
Figure 5.7 World Stock Market Capitalization
Figure 5.8 S&P 500 and EAFE Cumulative Returns, 1970–2009
Figure 5.9 U.S. and Foreign Stock Returns by Decade, 1971–2009
Figure 5.10 Foreign Stock Returns in Local Currency and Currency Gains, 1970–2009
Figure 5.11 Exchange Rate for the Euro since 1999
Figure 5.12 European Stock Returns since the Euro Was Introduced
Figure 5.13 Standard Deviations of Stock Market Returns in Dollars, 1970–2009
Figure 5.14 Portfolios of U.S. and Foreign Stocks, 1970–2009
Figure 5.15 Correlations between S&P 500 and EAFE Measured over Five- and 10-Year Periods, 1970–2009
Figure 5.16 Toyota Tokyo Stock Price in Dollars and Toyota New York ADR Price in Dollars
Figure 5.17 World Gross National Income in U.S. Dollars, 2008
Figure 5.18 Gross National Income of Largest Emerging Market Countries, Billions of Dollars in 2008
Figure 5.19 GNI Per Capita, Actual and PPP-Adjusted, 2008
Figure 5.20 Stock Market Capitalization of the Emerging Markets
Figure 5.21 Growth and Stock Returns, 1990–2009
Figure 5.22 China and Emerging Asia Stock Markets Compared, 1992–2009
Figure 5.23 Emerging Market Stocks before and after the Asian Crisis Years of 1997–1998
Figure 5.24 Emerging Market Bond Spread (in Basis Points above U.S. Treasury Yield)
Figure 5.25 Inflation and U.S. Treasury Bond Yields, 1949–2009
Figure 5.26 Nominal and Real Treasury Bond Returns by Decade
Figure 5.27 Interest Rates and Inflation Rates of the Major Industrial Countries, 1981–2008
Figure 5.28 Term Structure of Treasury Bond Yields
Figure 5.29 U.S. Bond Market in 2008
Figure 5.30 U.S. Bond Market in 1985 and 2008
Figure 5.31 High-Yield Default Rates, 1984–2009.
Figure 5.32 Spread of High-Yield Bonds over Treasuries
Figure 5.33 World Bond Markets, 2008 (Total Size of the World Bond Market in 2008 = $82.5 trillion)
Figure 5.34 Standard Deviations of Government Bond Returns in Dollars, Hedged and Unhedged, 1987–2009

Chapter 6

Figure 6.1 The Capital Market Line

Chapter 7

Figure 7.1 Probability of Security Price at Year End
Figure 7.2 Normal Probability Distribution
Figure 7.3 Skewed Probability Distributions: Equal Means and Variances but Different Downside Risk
Figure 7.4 Shortfall Probability
Figure 7.5 Skewness
Figure 7.6 Histogram of U.S. Large Company Stock Returns, 1926–2008 (percent)
Figure 7.7 Kurtosis

Chapter 8

Figure 8.1 Probability Distribution of Portfolios C and D
Figure 8.2 Efficient Frontier

Chapter 9

Figure 9.1 Country and Regional Contributions to Global GDP and Equity Market Capitalization (2007)
Figure 9.2 Real Returns on Global Equity Securities, Bonds, and Bills during 1900–2008
Figure 9.3 Real Returns on Global Equity Securities during 1900–2008, 1990–1999, and 2000–2008
Figure 9.4 Extreme Losses in Global Equity Markets during 1900–2008
Figure 9.5 Example of Increased Globalization of Share Ownership
Figure 9.6 Impact of Reinvested Dividends on Cumulative Real Returns in the U.S. Equity Market: 1900–2008
Figure 9.7 Equity Style Box
Figure 9.8 The DuPont Model.

Chapter 10

Figure 10.1 Inflation and U.S. Treasury Bond Yields, 1949–2009
Figure 10.2 Nominal and Real Treasury Bond Returns by Decade
Figure 10.3 Interest Rates and Inflation Rates of the Major Industrial Countries, 1981–2008
Figure 10.4 Term Structure of Treasury Bond Yields
Figure 10.5 U.S. Bond Market in 2008
Figure 10.6 U.S. Bond Market in 1985 and 2008
Figure 10.7 High-Yield Default Rates, 1984–2009
Figure 10.8 Spread of High-Yield Bonds over Treasuries
Figure 10.9 World Bond Markets, 2008 (Total Size of the World Bond Market in 2008 = $82.5 trillion)
Figure 10.10 Standard Deviations of Government Bond Returns in Dollars, Hedged and Unhedged, 1987–2009
Figure 10.11 Price/Yield Relationship of the Straight Bond
Figure 10.12 Price/Yield Relationship of the Callable Bond
Figure 10.13 Price/Yield Relationship of the Putable Bond
Figure 10.14 Value of a $1,000 Face-Value Bond That Has Five Years Remaining to Maturity and Is Priced to Yield 10 percent for Different Coupon Rates
Figure 10.15 Value of a Five-Year, $1,000 Face Value Bond with an 8 percent Coupon for Different Yields to Maturity
Figure 10.16 Value of a Five-Year Maturity Zero Coupon Bond for Different Yields to Maturity
Figure 10.17 Value of Bonds with Six Years to Maturity: Bond C has a 5% Coupon and Bond D is a Zero-Coupon Bond
Figure 10.18 Value of a 10 percent Coupon, $1,000 Maturity Value Bond, with 10 Years to Maturity and Priced to Yield 6 percent
Figure 10.19 Value of a 10 percent Coupon, $1,000 Maturity Value Bond, with 10 Years to Maturity, and Priced to Yield 6 percent for the First Five Years and 4 percent for the Last Five Years
Figure 10.20 Value of a 4 percent Coupon, $1,000 Maturity Value Bond, with 10 Years to Maturity, and Priced to Yield 6 percent
Figure 10.21 Comparison of Convergence of Values for Three 20-Year Bonds with Coupon Rates of 4 percent, 6 percent, and 8 percent, respectively, if the Yield to Maturity Remains at 6 percent throughout the Life of the Bonds
Figure 10.22 Yield Curves on U.S. Treasury Securities for Two Different Dates

Chapter 11

Figure 11.1 Example of a Foreign Exchange Transaction
Figure 11.2 Spot Exchange Risk
Figure 11.3 Currency Hedging Taxonomy
Figure 11.4 Carry Trade: Long Turkish Lira, Short Swiss Franc

Chapter 12

Figure 12.1 Benchmark Returns Ranked by S&P 500 (2001–2008)
Figure 12.2 CISDM Hedge Fund Strategy Returns Ranked by S&P 500 (2001–2008)
Figure 12.3 CISDM CTA Indices Ranked by S&P 500 (2001–2008)
Figure 12.4 Private Equity Returns Ranked by S&P 500 (2001–2008)
Figure 12.5 FTSE REIT Returns Ranked by S&P 500 (2001–2008)
Figure 12.6 Commodity Benchmark Ranked by S&P 500 (2001–2008)
Figure 12.7 Convergence of Bond Yields in Europe, 1995–1998
Figure 12.8 Hedge Funds by Strategy in TASS Database, 2004
Figure 12.9 Overlap of Databases
Figure 12.10 Hedge Fund Returns in the Crisis, October 2007 to December 2008
Figure 12.11 Excess Returns of First and Third Quartile Managers (Relative to Median Manager), 1994–2004
Figure 12.12 Alphas of Top Decile and Bottom Decile Managers, 1996–2005
Figure 12.13 Hedge Fund and Fund of Fund Returns, 1994–2009
Figure 12.14 REITs Added to Stock and Bond Portfolios
Figure 12.15 David Swensen's Portfolio for Individual Investors
Figure 12.16 Conventional Portfolio with Traditional Investments and HNW Portfolio with Alternative Investments
Figure 12.17 HNW Portfolio Compared with Portfolio without Alternative Investments
Figure 12.18 Target Portfolio of Yale Endowment, (2009)
Figure 12.19 Allocation to Alternative Investments: Yale Endowment and University Endowments (NACUBO Survey)
Figure 12.20 Investments of Pension Plans, Endowments, and Foundations
Figure 12.21 Alpha* of Yale Endowment Returns Relative to Conventional Portfolio, 1985–2009
Figure 12.22 Alpha* of Yale Endowment Returns Relative to Indexed Portfolio and Conventional Portfolio

Chapter 13

Figure 13.1 Profit/Loss Profile at Expiration Call
Figure 13.2 Profit/Loss Profile at Expiration Put
Figure 13.3 Theoretical Call Price and Price of Underlying
Figure 13.4 Estimating the Theoretical Option Price
Figure 13.5 Equity Swaps
Figure 13.6 Asset Allocation Using an Equity Swap Structure
Figure 13.7 Expected Return and Beta for Option Strategies

Chapter 14

Figure 14.1 Line Chart: FTSE 100 Quarterly Price Data, 1984–2009 (price measured in British pounds sterling)
Figure 14.2 Bar Chart Notation
Figure 14.3 Bar Chart: Bovespa Index, November 2007–November 2009 (price in Brazilian reais)
Figure 14.4 Construction of a Candlestick Chart
Figure 14.5 Candlestick Chart: Companhia Vale do Rio Doce, January 1–June 15, 2009 (prices in U.S. dollars)
Figure 14.6 Point and Figure Chart: Wharf Holdings Daily Price Chart, 2007–2009 (in Hong Kong dollars)
Figure 14.7 Dow Jones Industrial Average on Linear Scale, 1928–2010 (in U.S. dollars)
Figure 14.8 Dow Jones Industrial Average on Logarithmic Scale, 1928–2010 (in U.S. dollars)
Figure 14.9 Daily Candlestick Price Chart and Volume Bar Chart: TD Bank, November 2007–November 2009 (price in Canadian dollars)
Figure 14.10 Relative Strength Analysis: HOG versus the S&P 500 and RODM versus the S&P 500, January–June 2009
Figure 14.11 Trend Analysis: China Mobile Weekly Price Chart, 2002–2010 (prices in Hong Kong dollars)
Figure 14.12 Support Level: DJIA Weekly Price Chart, 1990–2001 (price in U.S. dollars ÷ 100)
Figure 14.13 Head-and-Shoulders Pattern: Marvell Technology Daily Price Chart, June 2005–June 2006 (price in U.S. dollars ÷ 100)
Figure 14.14 Calculating Price Target: Marvell Technology Daily Price Chart, June 2005–November 2006 (price in U.S. dollars)
Figure 14.15 Calculating Price Target for Inverse Head-and-Shoulders Pattern: DJIA Daily Price Chart, February 2002–January 2004 (price in U.S. dollars ÷ 100)
Figure 14.16 Double-Bottom Pattern: Time Warner Daily Price Chart, November 2007–October 2009 (price in U.S. dollars)
Figure 14.17 Triple-Top Pattern: Rockwell Automation Daily Price Chart, 1999 (price in U.S. dollars)
Figure 14.18 Ascending Triangle Pattern
Figure 14.19 Descending Triangle
Figure 14.20 Symmetrical Triangle Pattern: Transocean Weekly Price Chart, June 1999–June 2000 (price in U.S. dollars)
Figure 14.21 Rectangle Patterns
Figure 14.22 Pennant Formation: China Mobile ADR, November 2006–July 2009 (price in U.S. dollars)
Figure 14.23 Daily Price Chart with 20-Day and 60-Day Moving Averages: Gazprom EDR, November 2007–August 2009 (price in euros)
Figure 14.24 Bollinger Band Using 60-Day Moving Average and Two Standard Deviations: Gazprom EDR Daily Price Chart, November 2007–August 2009 (price in euros)
Figure 14.25 Momentum Oscillator with 100 as Midpoint: Toyota Motor, May 2008–October 2009 (price in Japanese yen)
Figure 14.26 Candlestick Chart with RSI: Ford, January–August 2009 (price in U.S. dollars)
Figure 14.27 Weekly Price Chart and Stochastic Oscillator: Petroleo Brasileiro ADR, June 2008–July 2009 (price in U.S. dollars)
Figure 14.28 MACD and Daily Price Chart: Exxon Mobil, March–November 2005 (price in U.S. dollars)
Figure 14.29 VIX, March 2005–December 2009
Figure 14.30 Margin Debt in U.S. Markets versus S&P 500, 2000–09
Figure 14.31 Arms Index for the S&P 500, January–July 2009
Figure 14.32 Mutual Fund Cash Position, 1984–2008
Figure 14.33 Impulse Waves and Corrective Waves
Figure 14.34 Relative Strength of 10-Year T-Bonds versus S&P 500, September 2008–July 2009
Figure 14.35 S&P 500 Index versus Commodity Prices, November 2007–November 2009

Chapter 15

Figure 15.1 Timeline of Financial Advances in Asset Allocation
Figure 15.2 Capital Market Line
Figure 15.3 Security Market Line
Figure 15.4 Price of Intel: December 16, 2009
Figure 15.5 Investment Opportunity Set
Figure 15.6 Minimum-Variance Frontier
Figure 15.7 Optimal Risky Portfolio
Figure 15.8
Figure 15.9 Optimal Investor Portfolio
Figure 15.10
Figure 15.11
Figure 15.12
Figure 15.13
Figure 15.14 The Capital Market Line
Figure 15.15 Optimal Portfolio and the Capital Market Line
Figure 15.16 Systematic and Unsystematic Portfolio Risk

Chapter 16

Figure 16.1 The Value Function—a Key Tenet of Prospect Theory
Figure 16.2 Cognitive Dissonance Theory
Figure 16.3 Modeling Cognitive Dissonance in Festinger's Peg Experiment
Figure 16.4 Montier Observes That Analysts Cling to Their Forecasts
Figure 16.5 Classic Confirmation Bias Experiment
Figure 16.6 A Sample Distribution of the Descending Outcome Sequence in “The Illusion of Control: What's Luck Got to Do with It?”
Figure 16.7 Sample Distribution of the Random Outcome Sequence in “The Illusion of Control: What's Luck Got to Do with It?”
Figure 16.8 Which Line Is Longer?
Figure 16.9 Which Line Is Longer?
Figure 16.10 The Value Function—a Key Tenet of Prospect Theory

Chapter 17

Figure 17.1 Steps Involved in Strategic Asset Allocation
Figure 17.2 Efficient Frontier
Figure 17.3 Correlation of Returns: (a) Positively Correlated; (b) Negatively Correlated
Figure 17.4 Efficient frontier.
Figure 17.5 Efficient Frontier with Parameter Uncertainty
Figure 17.6 Efficient Portfolios
Figure 17.7 Efficient Frontiers with and without Alternative Assets
Figure 17.8 Fund Revenues and Spending
Figure 17.9 Hypothetical Pension Plan's Cash Flow Profile
Figure 17.10 Simulated Path of Outcomes
Figure 17.11 Comparison of Boxplot and Probability Distribution
Figure 17.12 Annualized Return at Year Five
Figure 17.13 Funding Ratio at Year Five
Figure 17.14 Future 10-Year Rates of Return When Stocks Are Purchased at Alternative Initial Price-to-Earnings Multiples
Figure 17.15 Average Monthly Returns for Portfolios Formed on Market Capitalization
Figure 17.16 Twelve-Month Rolling Returns: Risk-Based Portfolios and Tactical Asset Portfolio
Figure 17.17 VAMI: Risk-Based Portfolios and Tactical Asset Portfolio
Figure 17.18 Benchmark Strategic Asset Allocation Process
Figure 17.19 Strategic Benchmark, Core, and Satellite Groupings

Chapter 18

Figure 18.1 Asset Allocation of Sampo

Chapter 19

Figure 19.1 Cumulative Value of a Buy-and-Hold Strategy Invested in the Market Cap-Weighted Equity Index, the Minimum Variance Equity Index, and the Hedged Barclays Global Treasuries Bond Index
Figure 19.2 One-Year Rolling Volatility Estimates for the Market Cap-Weighted and Minimum Variance Equity Index, and the Hedged Barclays Global Treasuries Index
Figure 19.3 Weight of Equity in the ERC and 60/40 Risk Allocation Portfolio. The Equity Portion Is Either Invested in the World Market Cap-Weighted Index or the Minimum Variance Index
Figure 19.4 Portfolios for Investors 15 Years Prior to and at Retirement (Vanguard 2025 Target Retirement Fund)
Figure 19.5 Vanguard's Target Portfolio Allocations Determined by Years until Retirement
Figure 19.6 2010 Asset Allocations for Four Target 2025 Funds
Figure 19.7 Pensions of Full-Time Employees in Private Industry in 2003, U.S. Department of Labor
Figure 19.8 Life Expectancies of Today's 62-Year-Olds
Figure 19.9 Spending Rules and Failure Rates for Single Man and Married Couple
Figure 19.10 Effects of Bequest and Flexible Spending
Figure 19.11 U.S. Labor Force by Age Percent Change from 2006 to 2016

Chapter 20

Figure 20.1 Index Returns Compared to Median, Top, and Bottom Funds (10 Years Ended December 31, 2009).
Figure 20.2 Manager Changing Investment Style: (a) Before; (b) After
Figure 20.3 Risk and Return Effect of Manager Changing Style
Figure 20.4 Fee Schedule Universe of International Fixed Income Managers
Figure 20.5 Changing Importance of Alpha and Beta in Return Estimation
Figure 20.6 Return Convexity

Chapter 21

Figure 21.1 Russell Growth and Value Returns in 1999 and 2000
Figure 21.2 Diversified Portfolio in October 2002
Figure 21.3 Drift of Portfolio Shares in Boom Barclays Capital, Russell^®, MSCI, and ©FTSE
Figure 21.4 Drift of Portfolio Shares in Bust
Figure 21.5 Levels of Reporting
Figure 21.6 Manager D's Value Added; Period to September 31, 2012
Figure 21.7 Style over Time; Period to September 31, 2012
Figure 21.8 Performance against Peers; Period to September 31, 2012

Acknowledgments

IMCA Board of Directors

John Nersesian, CIMA, CFP, CPWA (Chair)

Scott Thayer, CIMA (Vice Chair)

Kevin Sanchez, CIMA, CFP, CPWA (Treasurer)

David Koulish, CPWA, CFP (Secretary)

Betsy Piper/Bach, JD, CIMA, CFP, CTFA (Past Chair)

David Archer, CIMA, AIFA

Dorothy Bossung, CIMA, CFP, CPWA

Bruce Curwood, CIMA, CFA

Tony Davidow, CIMA

Stewart Koesten, CIMA, CFP, AIF

John Moninger, CIMA, CPWA, AIF

Margaret Towle, PhD, CIMA, CPWA

Brett Wright, CIMA, CPWA

Keith Clemens, CIMA, CPWA

Todd Wagenberg, CIMA

CIMA Certification Commission

Jay Shein, PhD, CIMA, CFP (Chair)

David Archer, CIMA, AIFA

Lewis Assaley, PhD, CIMA

David Cordell, PhD, CFP, CFA

Alfred Eaton, CIMA, CFP

Phil Fazio, DBA, CFP, CIMA

Todd Wagenberg, CIMA

Ellen Walsh, CIMA

Deidre Spurlin Waltz, CIMA, CPWA, CFP

Frederick Weiss, CIMA

Grace Wellerts, CIMA, CFP

IMCA Technical Advisory Board

Bruce Curwood, CIMA, CFA

Phil Fazio, DBA, CFP, CIMA

Jonathan Golub, CFA

Nigel Lewis, PhD

Rex Macey, CIMA, CFA, CFP

Ash Rajan, MBA

Jay Shein, PhD, CIMA, CFP

Scott Thayer, CIMA

Margaret Towle, PhD, CIMA, CPWA

IMCA Staff

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Debbie Nochlin (Managing Editor, Investments & Wealth Monitor and Journal of Investment Consulting)

A special thanks goes to Jamie Lewis for organizing and managing this project. Your patience and persistence were critical. This would never have come together without your tireless work. Thank you, Jamie!

Contributing Authors

M.J. Alhabeeb, PhD

Noel Amenc, PhD

Howard J. Atkinson, CIMA, CFA

Mark J. Anson, PhD, JD, CPA, CFA, CAIA

Kris Boudt, PhD

Alistair Bryne, PhD, CFA

Gerald W. Buetow Jr., PhD, CFA

Roger G. Clarke, PhD

W. Sean Cleary, PhD, CFA

Bruce M. Collins, PhD

Robert M. Conroy, DBA, CFA

Garry B. Crowder, JD

Christopher L. Culp, PhD

Joakim Darras

Pamela P. Drake, PhD, CFA

Frank J. Fabozzi, PhD, CFA, CPA

Ryan C. Fuhrmann, CFA

Khalid Ghayur, CFA

Felix Goltz

Larry Harris, PhD

Ronan G. Heaney

IMCA

David Iverson

Robert R. Johnson, PhD, CFA

David M. Jones, PhD

Paul D. Kaplan, CFA

Hossein Kazemi, PhD, CFA

Dorothy C. Kelly, CFA

Stephan A. Komon, CFA

Mark Kritzman, CFA

Asjeet S. Lamba, CFA

Veronique Le Sourd

Richard C. Marston, PhD

Lionel Martellini, PhD

Ron Mensink, CFA

Michael B. Miller

Benedict Peeters

Stephen C. Platt, CFA

Michael Pompian, CFA, CFP, CAIA

Ellen J. Rachlin

Bernd Scherer, PhD

Thomas Schneeweis, PhD, CAIA

Shani Shamah

Barry M. Sine, CFA

Vijay Singal, PhD, CFA

Frank E. Smudde, CFA

Robert A. Strong, CFA

Jarrod W. Wilcox, PhD

Richard Yamarone

Subject Matter Experts and Colleagues (who directly or indirectly influenced the development of this text)

Yacine Ait-Sahalia, PhD

Andrew Ang, PhD

Garry Bridgeman, CIMA

Jean Brunel, CFA

Mike Gallmeyer, PhD

Chris Geczy, PhD

Roger Gibson, CFA, CFP

John Granzow, CIMA

Mark Harbour, CFA, CIMA

Michael Kitces, MTAX, CFP

Jeff Jaffe, PhD

Richard Joyner, CPA, PFS, CFP, CIMA, CPWA

Greg LaBlanc, JD

Pierre Liang, PhD, CPA

Wai Lee, PhD

Andrew Lo, PhD

Arthur Lyons

Craig MacKinlay, PhD

Toby Moskowitz, PhD

Dede Pahl

Raghuram Rajan, PhD

Tarun Ramadorai, PhD

Doug Rogers, CFA

Geert Rouwenhorst, PhD

Shashin Shah, CFA, CFP

Ron Surz, CIMA

Jeff Thomas, JD, CIMA, CPWA

Vijay Vaidyanathan, PhD

Pietro Veronesi, PhD

Scott Welch, CIMA

The Investment Advisor Body of Knowledge

Readings for the CIMA^® Certification

Acknowledgments

Readings for the CIMA® Certification

Readings for the CIMA^® Certification