INVESTMENT MANAGEMENT

Investment Management

Investment Management

Initial portfolio

ASSET

RETURN

WEIGHT

PRODUCT

1

GPU

0.1267

0.00%

0

2

Teledyne

0.1396

25.00%

0.0349

3

Kodak

0.1402

25.00%

0.03505

4

Thai Fund

0.2075

0.00%

0

5

Merck

0.1781

0.00%

0

6

ATT

0.1126

50.00%

0.0563

TOTAL

100%

Final Portfolio

In ten weeks we re-structured portfolio by correcting stocks that optimized with low rate of return with lo fluctuating in price by investing in other companies we analyzed below rate of return in selective stocks.

OPTIMAL PORTFOLIOS

Given

Best

Composition

Return

Std. Dev.

GPU

Teledyne

Kodak

Thai Fund

Merck

ATT

ALL ATT

0.1126

0.1606

0.1126

0%

0%

0%

0%

0%

100%

0.115

0.1548

0.115

17%

0%

0%

0%

0%

83%

0.12

0.1494

0.12

33%

0%

5%

2%

0%

60%

0.125

0.1475

0.125

36%

0%

6%

6%

0%

52%

MIN RISK

0.1283

0.1471

0.1283

38%

0%

6%

9%

0%

47%

0.13

0.1472

0.13

39%

0%

7%

11%

0%

44%

0.14

0.1509

0.14

44%

0%

9%

16%

5%

25%

0.15

0.1572

0.15

50%

0%

12%

20%

11%

7%

0.16

0.168

0.16

43%

0%

11%

28%

18%

0%

0.17

0.184

0.17

30%

0%

9%

37%

24%

0%

0.18

0.2045

0.18

17%

0%

7%

46%

30%

0%

0.19

0.2282

0.19

4%

0%

5%

55%

36%

0%

MAX RETURN

0.2075

0.3278

0.2075

0%

0%

0%

100%

0%

0%

ORIGINAL

12.63%

18.66%

0.12625

0%

25%

25%

0%

0%

50%

Investment Philosophy

An investment philosophy is a coherent way of thinking about markets, how they work (and sometimes do not) and the types of mistakes that you believe consistently underlie investor behaviour. Why do we need to make assumptions about investor mistakes? As we will argue, most investment strategies are designed to take advantage of errors made by some or all investors in pricing stocks. Those mistakes themselves are driven by far more basic assumptions about human behaviour. To provide an illustration, the rational or irrational tendency of human beings to join crowds can result in price momentum - stocks that have gone up the most in the recent past are more likely to go up in the near future. Let us consider, therefore, the ingredients of an investment philosophy (Fong, 1997, 51).

Human Frailty

Underlying all investment philosophies is a view about human behaviour. In fact, one weakness of conventional finance and valuation has been the short shrift given to human behaviour. It is not that we (in conventional finance) assume that all investors are rational, but that we assume that irrationalities are random and cancel out. Thus, for every investor who tends to follow the crowd too much (a momentum investor), we assume an investor who goes in the opposite direction (a contrarian), and that their push and pull in prices will ultimately result in a rational price (Karnosky, 1994, 41). While this may, in fact, be a reasonable assumption for the very long term, it may not be a realistic one for the short term.

Academics and practitioners in finance who have long viewed the rational investor assumption with scepticism have developed a new branch of finance called behavioural finance which draws on psychology, sociology and finance to try to explain both why investors behave the way they do and the consequences for investment strategies. As we go through this section, examining different investment philosophies, we will try at the outset of each philosophy to explore the assumptions about human behaviour that represent its base.

Market Efficiency

A closely related second ingredient of an investment philosophy is the view of market efficiency or its absence that you need for the philosophy to be a successful one. While all active investment philosophies make the assumption that markets are inefficient, they differ in their views on what parts of the market the inefficiencies are most likely to show up and how long they will last. Some investment philosophies assume that markets are correct most of the time but that they overreact when new and large pieces of information are released about individual firms - they go up too much on good news and down too much on bad ...