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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (12628)	5/16/2010 6:28:29 AM
From: Elroy	Respond to of 33421

just got done taking a course in Investments and Mutual Fund Management and Fisher Black in addition to developing the Black Scholes option valuation model, also developed What was the course about, again?

To: John Pitera who wrote (12628)	5/17/2010 4:05:31 AM
From: John Pitera	1 Recommendation Respond to of 33421

Hi Elroy, the course covered a broad spectrum of the investment process. Asset classes and financial instruments. Portfolio Theory and practice, including some of the historical developments in risk vs reward, talking about Sharpe's risk/ reward ratio; Constructing Optimal risky portfolio's Then getting into the evolution of Portfolio analysis starting with Markowitz's Porfolio selection Model which I believe data's back$ to the 1950's with his diagonal tree of possible investment outcomes. I'm pretty sure that Markowitz's paper was where the so called " efficient frontier" first appears. The course went on to the Capital Asset pricing model...etc an area on security analysis including Free cash flow analysis and dividend discount models to determine intrinsic value, as well as the relative valuation techniques ( P/E, Price to book, price to sales, compared stock's peer group and the market) .... a bit of financial statment analysis including Decomposition of Return on Equity. (I learned that Dupont, was the first company to present some of this type of analysis way back in 1919 or so, and obviously to underscore how well the company was doing/ and or why it was undervalued -g-) And then the projects were on Applied portfolio management, and the Theory of Active Porfolio management. You can run data series - the risk free tbill yield against the benchmark index and come up with Alpha (the return in excess of the calculated volatility - Beta) and calculate in excel workbooks, other performance and risk attributes, Beta, Gruber's Alpha ( market timing ability of active managers) Other esoteric measures such as Treynor's measure, M squared . Some of those are determined for an overall portolio's return. Fisher Black helped to build two of the models that are in vogue for Porfolio Evaluation and Active Portfolio Management. But you know at the end of the day, you end up with the knowledge that modeling the past does not always forecast the future. We can have statistical outlier events like LTCM, The Thai Bhat Asia Pacific Rim meltdown, The dot com tech bubble, Bear Sterns, and Lehman, Greece etc that were thought to be 4 to 6 to 8 standard deviations away and yet they keep recurring every few years, instead of every 5000 years. Numbers are massaged as to reduce the represented actual riskiness and leverage associated with so much of financial/ investment activities. And in periods of economic expansion the greed/fear equilibrium mechanism is knocked out of whack as fear is subsumed in the Speculative mania. On top of this proposal of reality, one should overlay the fact that the investment markets have almost continually rewarded those individuals who have proverbially "swung for the fences" and have focused on delivering outsized returns for a period of time and then blow up the portfolio or fund. two excellent examples are Amaranth Advisors LLC was an American investment adviser managing multi-strategy hedge funds with approximately US$9 billion in assets. In September 2006, it collapsed after losing roughly US$6 billion on natural gas futures. The failure was one of the largest known trading losses and hedge fund collapses in history. Amaranth was founded by Nicholas Maounis and headquartered in Greenwich, Connecticut. The firm's energy trader, Brian Hunter, helped in the growth of the firm but also contributed to its collapse. Brian Hunter was back at work trading at another fund within a year. Victor Niederhoffer who wrote the very successful education of a speculator, had a managed fund that was widely reported to have been wiped totally out on the Oct 27th 1997 Market blow out of 554 (7.2%) loss. He was said to have writen out of the money index puts that took the 200 million dollar fund down to zero when the clearing firms closed him out. He has subsequently been managing money again. So thus we have lived in an era where, Investment professionals and investors of all stripes have had the system inculcate them with a swing for the fences approach to seeking returns. We will likely see a time when we reach even greater aversion to "Optimal Risky Strategies" and also the downside of unchecked debt accumulation by our governmemts. Sorry, I know this answer is like the old saw of the man who asks a question about elephants and after a very detailed answer...... his comment is. Well that's all nice, but frankly it's much more than I care to know about elephants --g-- John