Utility and Maximization Strategic asset allocation involves deciding among the various securities within a portfolio and the relative weightings of each. Asset allocation differs from Investor to Investor as the optimal mix depends on the investor’s preferences. The utility theory…

Portfolio managers rely on one of three frameworks for analyzing and managing their portfolios. The three approaches below have advantages and disadvantages, which the analysts and managers must know to make prudent investment decisions. Asset-only Approach This approach considers only…

There are three principal ways in which trade goods and services can influence exchange rates: Trade flows. Purchasing power parity. Current account. Trade flows tend to make up a small portion of total GDP and exert little influence on exchange…

Forecasting Real Estate Returns This reading focuses on directly held, non-levered, income-producing real estate. REITs are covered in further detail in other sections. Directly held real estate is distinct from other asset classes because it is immobile, illiquid, indivisible, and…

Governance Structures Corporate governance focuses on clarifying the mission, creating a plan, and reviewing progress toward achieving long and short-term objectives. In contrast, management efforts are geared toward outcomes—the execution of the plan to achieve the agreed-on goals and objectives….

Variance Covariance (VCV) Matrices The simplest and most commonly used method for estimating constant variances and covariances is to use variance or covariance–computed from historical return data. These elements are then assembled into a VCV matrix. The following table shows…

Passive Vs. Active Management In investment choices, investors have the initial question of whether their investments should be passively or actively managed. Passive management refers to tracking the performance of various indices, such as the S&P 500, and not making…

 The global market portfolio is a theoretical representation of the aggregation of every investable asset with respective weights held constant. While there may be an ETF somewhere that attempts to mimic this, it is safe to say that the…

How do the dealings of one country affect the economies of other countries across the globe? Most countries are linked via a global economic network of trade. Countries with more extensive, robust, and diverse economies tend to be less influenced…

Historical Statistical Approaches Historical statistical approaches involve the collection of data from past returns and using them to extrapolate future performance. Using a pure-historical returns approach to forecast equity market returns is complicated because equities have a high standard deviation…