Professional Documents
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where
! EXAMPLE
Monthly Returns
Period
! EXAMPLE
Monthly Returns
Period
Sharpes Model
Beta Estimates
MSCI:
ITALY (1)
NORTH AMERICA (2)
JAPAN (3)
EMU + UK (4)
ITALY 1 - 3Y (E) (5)
WRLD. SOV. (6)
WRLD. SOV. EX. EMU (7)
Sharpes Model
Beta Estimates
2
Var (e j )
R = 1
Var ( R j )
where
Var(Rj) =Variance of the j-th fund
Var(ej) = Variance of the residual
MONTHLY RETURNS
Selection
1%
Style
99%
Factors
Period
Period
Sum(Weights)
Style
Selection
Selection
18%
% of Total
Style
82%
Factors Weights
Period
Period
! Then,
R p ,t = p ,1 F1,t + ... + p ,k Fk ,t + e p ,t
30%x20%=6%
Investment Targets
R p ,t = 0,05 RF .cashA,t + 0,25 RF.int ermedA,t + 0,25 RF . growthA ,t + 0,20 RF .smallA,t + 0,25 RF .int ernA,t
Prof. Sandra Paterlini, Chair of Financial Econometrics & Asset Management 43
"Hitting the target!"
! Then,
R p ,t = p ,1 F1,t + ... + p ,k Fk ,t + e p ,t
RintermA,t=0,4Fcash,t+0,52Fintermediate,t+0,08Flong-term,t+eintermA,t
....
Betas of Sharpes Style Model
RcashA,t=0,8Fcash,t+0,2Fintermediate,t+ecashA,t
.....
and
R p = 0,05 RcashA + 0,25 Rint ermA + 0,25 RgrowthA + 0,20 RsmallA + 0,25 Rint ernA
R p = 0,05(0,8Fcash + 0,2 Fint ermediateB + ecashA ) + ..... + 0,20(....) + 0,25(....)
R p = 0,29 Fcash + 0,16 Fint ermediateB + 0,05 Flong + ....
..... + 0,02 Fint ernationalB + 0,22 Fl arg ecap + 0,15 Fsmall + 0,11Fint ernationalS + e p
Small Target
Intermediate International Multimanager Actual Target Desired
Model Factors Cash Fund A Growth Fund A Compan Difference
Bond Fund A
y Fund A
Fund A Portfolio Weights (A) Target(B)
(A-B)
Cash
Intermediate
Bonds
w (N.funds
Large Cap Stocks x1) =
t (N.factors t (N.factors t (N.factors
Small Caps B' (N.factors x N. Funds)
International
x1) x1) x1)
Stocks
Long-term Bonds
International
Bonds
Small Target
Multimanager
Intermediate Compan International Actual Desired
Model Factors Cash Fund A Growth Fund A y Fund Portfolio Difference
Bond Fund A Fund A
Weights Target (A) Target(B)
A (A-B)
Large Cap Stocks 60% 10% 20% WFgrowthA = 25% 25% 0.00%
Small Target
Intermediate International Multimanager Actual Target Desired
Model Factors Cash Fund A Growth Fund A Company Difference
Bond Fund A
Fund A
Fund A Portfolio Weights (A) Target(B)
(A-B)
Large Cap Stocks 60% 10% 20% WFgrowthA = 25% 25% 0.00%
International
Fund A
60.8% 25% 25% 0.00%
112.2% 5% 0% 5.00%
2% 0% 2.00%
100%
Sum Difference (absolute value)
Actual vs Desired Actual Target- 7.0000%
Desired Target
Target
Actual Target Desired
Difference
(A) Target(B)
(A-B)
5%
25%
- 5%
25%
= 0.00%
0.00%
5% 0% 5.00%
2% 0% 2.00%
100%
Multimanager
Portfolio Weights
112.2%
Sum Weights1
Small Target
Multimanager
Intermediate Compan International Actual Desired
Model Factors Cash Fund A Growth Fund A y Fund Portfolio Difference
Bond Fund A Fund A
Weights Target (A) Target(B)
A (A-B)
Large Cap Stocks 60% 10% 20% WFgrowthA = 25% 25% 0.00%
Intermediate
Bond Fund A
0.0% 5% 25% -20.00%
Small Company
Fund A
29.5% 20% 20% 0.00%
International
Fund A
61.6% 25% 25% 0.00%
100.0% 0% 0% 0.00%
2% 0% 2.00%
100%
Sum Difference (absolute value)
Actual vs Desired Actual Target- -5.0000%
Desired Target
Multimanager
Portfolio
Weights
Small Company
Fund A
29.5%
International
Fund A
61.6%
5% 25% -20.00%
0% 0% 0.00%
2% 0% 2.00%
100%
Sum Difference (absolute value)
Actual vs Desired Actual Target- -5.0000%
Desired Target
MatLab implementation
function [b ,RSS, e, rsq, var_e] = style_sharpe (y, X, type)
% INPUT
% y = (vector num_observations x 1 ): time series of the funds
% X = (matrix num_observations x num_indexes): matrix of the indexes in Sharpe's model
% type (scalar 1x1): specifies which Sharpe model will be used
% type = 1 Weak style analysis; type = 2 Semi-strong style analysis; type = 3 Strong style analysis
% OUTPUT
% b = vector of weights for the Sharpe model
% RSS = scalar: regression sum of squares
% e = vector (num_observations x 1): vector of the errors
% rsq = scalar: R-square statistic
% var_e = vector (num_observations x 1): vector of the variance of the errors
yhat = X*b;
ESS = norm(yhat-mean(y))^2; % Explained sum of squares
TSS = norm(y-mean(y))^2; % Total sum of squares
var_e = var(yhat-y); % Variance of the error
rsq = ESS/TSS; % R-square statistic
Out-of-Sample Statistics