# General Questions From S11 - S18

#1, I don’t think so. If it’s true, then generally the price of small-cap securities is higher than that of large-cap. #4, hedge funds (positive or negative skewness, can use downside deviation instead).

When would hedge funds exhibit positive or negative skewness?

#7 - Use M^2 measure and Sharpe ratio -both use standard deviaiton (total risk)

P323, volume 4, Backfill Bias, makes results look too good because only components with good past results will be motivated to supply them.

#7. The reason I brought it up is there was a Schweser question where an endowment fund that was well diversified was looking to add a stock to it’s holdings. They ended up choosing the one with the better Treynor and Alpha ratios citing the fact that the ratio in these 2 measures were higher in one stock over the other and since the Endowment fund was already well diversified, they should look to add beta.

#7 Given that portfolio was already well diversified, you only care about systematic risk and thus look at measures that involve beta.

^ - I get that part of it… I guess my question is can we always strictly use Alpha/Treynor when deciding which portfolio is better diversified?

Assuming you have portfolios A and B and want to choose better diversified one, you calculate A’s and B’s Sharper Ratio and Treynor Ratios. If A’s Sharper ratio > B’s Sharper ratio, but B’s Treynor ratio > A’s Treynor ratio. Then you can conclude that although A has higher return adjusted for total risk, it’s return adjusted for systematic risk is less -> it has higher systematic risk and lower unsystematic -> A is better diversified. Can anybody confirm that?

PJStyles Wrote: ------------------------------------------------------- > ^ - I get that part of it… I guess my question > is can we always strictly use Alpha/Treynor when > deciding which portfolio is better diversified? you can’t, there are many instance where you need to use both beta measures (Jensen Alpha/Treynor) and total risk measures that use standard deviation (Sharpe, M^2) as an example you have 2 portfolios that have the same Treynor ratio (i.e., both have similar systematic risk exposure), however portfolio 1 has lower Sharpe ratio than portfolio 2; from this you can probably conclude that portfolio 1 has more unsystematic risk and thus less diversified

Makes total sense… gotta compare several ratios in conjunction with eachother. In other words, use a ratio that looks at systematic risk and one that uses unsystematic risk and see the effect on each and then derive a conclusion… beauty! Frig, lots of smart people on here… getting nervous I don’t know enough!!!

People here are top of the top

Let’s HOPE!

#1 Equities would have lower price because you would require a liquidity premium (reduced price) to buy the stock. On a similar note, scare fixed income investments such as callables and longer term maturities will demand a premium becasue they are scarce. #2) Don’t know #3) Cash and Carry: don’t even remember what this is #4) Investments with skewed distributions, stale pricing, or when investment is well-diversified (Treynor measure would be more appropriate in this case) #5) not sure #6) I don’t have the example in front of me but by the context I’d say your right… #7)Treynor, Jensen’s Alpha #8) I just went over this last night but would end up writing a volume if I described it all. But I believe they are saying that emerging equity markets are not actually correlated in times of crisis; it’s more related to the statistical properties of the correlation measure itself and while each country may be experiencing volatility they are not moving together in a concentrated fashion. But currency contagion is real based on countries following suit by devaluing their currency, or exports may be hurt becasue one country can no longer sell as much to a country whose currency has devalued thus causing a domino effect, investor’s may pull money out of the emerging markets during these times, etc. #9) You can carve out asset classes prior to 2010 as long as cash is approproately allocated to the carve-out. At 2010, you can no longer do this UNLESS the carve-out is actually managed separately (ie you have a balanced fund, the equity portion and associated cash is carved out, then you have a separate manager run this equity portion… that’s the only way you can carve out starting in 2010. As of now you can still carve out if just the cash is propoerly allocated). #10) Not sure. To me it seemed the modified dietz was more relevant but I thin these are the formulas: Original = EMV-BMV-CF/EMV+.5CF Modified =EMV-BMV-CF/EMV+sum of time-weighted cf’s