Eliminating the Price Effect of an Index Automatically Changes the Basic Characteristics of the Index

DFA’s investment strategy is based on their belief in the principle that stock market is efficient. They attempt to match a broad-based, value-weighted small-stock index and position themselves in the market as a passive fund manager that still claimed to add value by capturing specific dimensions of risks identified by financial science. DFA’s investment strategy incorporates elements of both passive and active management. It is passive in the sense that like many other index managers, it focuses on the importance of diversification, lower turnover and lower fees than actively managed portfolios. It is active in the sense that it develops its small-value stock focus based on academic research and uses certain techniques (such as

“The Benefits of diversification are clear. Portfolio theory has played a crucial role in explaining the relationship between risk and return where more than one investment is held. It also enables us to identify optimal and efficient portfolios.”

AGENDA 1. 2. 3. 4. 5. Announcements Financial Markets and Net Present Value Survey Results Optional Material (e.g. Cases, Practical

In which, old market index refers to the index for year t and new index is the index for year (t+1).

market, and the S&P GSCI All metals, which measures the performance of investment in precious and industrial metals. The weight of 90% is given to the Russell 3000 index because we believe that our portfolio represents the U.S. market. Typically, we invest approximately 30% of the total assets each in large-cap stocks, mid-cap stocks, and small-cap stocks. The weight of 10% is given to the S&P GSCI All metals because, on average, we take a position in futures contracts that are worth up to 10% of the total assets.

Investors tend to use triple-leveraged ETF to obtain triple the return yield of the investments. However, they are discouraged to invest on triple-leveraged ETF as the disadvantages overwhelm the advantages. One of the advantages of triple-leveraged ETF is that it gives three times the return whereas one of the disadvantages of triple-leveraged ETF is that it could lose triple of the tracked index. According to Cummans (2015), ‘The additional risks come in the form of counterparty risk, liquidity risk, and increased correlation risk’. Thus, ETF has higher risk as it may lose three times the return and increases bankruptcy rate. Result shows that the annual return to the triple-leveraged ETF is expected to be triple the annual return to the S&P 500 index, it is only applicable to theory where everything is in constant. In reality the tracked index fluctuating frequently, it will not be three times of the

Banks like Citibank (C) or any other banks in an exchange-traded fund (or ETF) like the Financial Select Sector SPDR (XLF) don’t get such a high rating. XLF includes all the important

This Saturday, December 3rd, we will be hosting Greg Francfort, a Senior Portfolio Manager from Neuberger Berman and Steve Catera, a Senior Associate from Siris Capital Group to judge the presentations. The presentations will be held in the Livingston Student Center Board Room from 10:00am to 3:00pm. Official time slots will be sent out after the research report and

To reduce a firm’s specific risk or residual risk a portfolio should have negative covariance or rather it should have no variance at all, for large portfolios however calculating variance requires greater and sophisticated computing power. As such, Index models greatly decrease the computations needed to calculate the optimum portfolio. The use of such Index models also eliminates illogical or rather absurd results. The Single Index model (SIM) and the Capital Asset Pricing Model (CAPM) are such models used to calculate the optimum portfolio.

• Flexibility of enhanced index - DFA’s index funds are custom built and are not standard indexes such as the S&P500, Russell 2000, etc. While standard index products are forced to adjust its portfolio based on its index composition, DFA can avoid paying a premium on a stock by taking their time to buy and sell a stock.

Unlike mutual funds who only charge a management fee, much of the hedge funds compensation structure is linked to the fund performance. To avoid cases of managers charging the investor performance fees twice for the same returns, there is a prescription that managers should not charge any fee for a fund that has lost ground (Boyson, 2010). However, when the performance surpasses the previous performance level known as a ?high water mark?, the manager can charge the performance fees once again. Furthermore, many funds may also carry out a hurdle rate that managers must achieve before they charge any incentive fees (lecture notes).

In 1996, Citibank was an emergent banking institution attempting to increase its market share in the competitive Los Angeles area. In order to do so, the bank’s strategy was to focus slightly less on their financial growth, and much more on providing “a high level of service to its customers”. Management viewed this paradigm shift as “critical to the long term success of the franchise”.

Diversification is a method of investing that been shown to increase portfolio return while reducing portfolio risk as measured by standard deviation. This method specifically increases the efficient frontier for investors. The challenge to an investing firm is an appetite by its customers for an ever increasing efficient frontier. One area to explore to obtain this increase is through further diversifying through international diversification.

The results using the Monte Carlo Simulation to model the portfolio were poor. The author shows that although there is reduced risk compared to an all stock portfolio the rewards (returns) are lower. This means a fund manager may move to all stock portfolios.

His lack of diversification is a strong contrast to that of the traditional method; however, this lack of diversification has helped his personal portfolio to outperform market indexes, used as benchmarks for returns on stock market investments, such as the Dow Jones Industrial, the Nasdaq, and the Standard and Poor 's 500 (S & P 500) every year for the past 40 years.