Introduction to Fundamental Analysis - NYU

Introduction to Fundamental Analysis - NYU

Brain Teasers You have eight balls and a balance scale. One of the balls is heavier than the other 7. What is the lowest number of weighings on the scale that you need to do in order to determine which ball is heaviest? Answer Two Weigh 3 against 3. Either you have a set of 3 that is heavier than the other, or you know the heavier ball is in the remaining 2

From the remaining 3 or 2, weigh 1 against 1. Then you will determine the heavier ball. Announcements Upcoming Presentations: Technicals Alumni Mingle MIT Trading Competition Market Update: The Macro View

4 Quantitative Finance Society Portfolio Strategies & Asset Correlations 5 Investment Objective Why? Absolute Return

Hedge Funds Relative Return Mutual Funds, Asset Management Retirement, Pensions, Insurance Asset-Liability Management 6 Absolute Return Strategies

Equity-Focused Value-investing Event-driven, Merger/Risk Arbitrage Long/short 130/30 Equity pairs trading 100/100 (market-neutral)

Fixed Income Distressed debt/high yield Convertible arbitrage Pricing arbitrage Value credit

7 Absolute Return Strategies Global Macro FX, Government Rates

Sovereign Debt (Credit & Rates) Emerging Markets Funds Commodity Funds (Physical & Futures) Index & ETF Relative-Value 8 Absolute Return Strategies Quantitative

Volatility, Derivative arbitrage Algorithmic, High-Frequency trading Statistical arbitrage Technical analysis, momentum-based 9 Relative Return Strategies

Mutual Funds & Asset Management Most active managers underperform the market Invest in S&P 500 or other index Passive management, cheaper fees and lower transaction costs Asset allocation decisions are more important than single-stock selection Risk-adjusted returns come from diversification

10 Relative Return Strategies Portfolio Theory Fixed Allocation (long-term historical) Long-term mean-variance optimization Efficient markets Adaptive Allocation (short-term historical) Markets change over time because of investor behavior Use trailing returns, correlations and volatility data instead

Tactical Allocation (historical + forward-looking) Forecast the market and incorporate your view into the allocation Market timing Black-Litterman model 11 Asset Classes & Correlations

Equity (Domestic, Intl) Fixed Income (Domestic, Intl) Cash, FX, Money-market funds Commodities Metals, Agriculturals, Energy, Softs Real Estate

12 Asset Classes & Correlations 13 Asset-Liability Management Retirement & Pension Funds Need to pay out fixed pension benefits or retirement benefits (annuities/perpetuities) Must invest in securities to match the

payments Insurance companies Receive fixed insurance payments forever, in exchange for low-probability high-payout Reinsurance to spread risk 14 Asset-Liability Management Fixed-income portfolio immunization

Duration-hedging Convexity-hedging 15 Questions? 16

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