Lecture

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  Lecture
  
  Analysis of abnormal return
  of managed portfolios by E. Fama.
  GSS. CFDR. NSS.
  
  

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  Eugene Fama
  Born in 1939, an American economist, known for his work on portfolio theory and asset pricing, both theoretical and empirical.
  
  Currently he is a professor of finance at the University of Chicago Booth School of Business. MBA, PhD.
  

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  Eugene Fama
  E. Fama is most often thought of as the father of efficient market hypothesis (EMH), beginning with his Ph.D. thesis.
  
  In a ground-breaking article in the May, 1970 issue of the Journal of Finance, entitled "Efficient Capital Markets: A Review of Theory and Empirical Work," E. Fama proposed three types of efficiency:
  strong-form;
  semi-strong form; and
  weak efficiency.
  
  He was a co-founder of Fama–French three-factor model (1993).
  
  

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  GSS, Gross security selection = ract - rCAPM = CFDR + NSS
  
  CFDR, Compensation for diversifiable risk is the effect of higher volatility of portfolio on the GSS.
  
  CFDR = (rm – rf)*(sigmap/sigmam – betap)
  
  sigmap/sigmam could be called the «degree of volatility»
  
  NB: sigmap/sigmam > betap
  Analysis of abnormal return
  by E. Fama
  

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  NSS, Net security selection= GSS – CFDR
  
  NSS is the effect of “smart” selection of securities for a portfolio, and effective & efficient trading (opening/closing positions).
  
  
  

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  In 2012, a managed portfolio:
  mean returnp = 0,41%
  betap = 0,77
  sigmap = 3,55%
  Market proxy is ACWIFM (0,24%;1,83%)
  
  Find:
  GSS
  Degree of volatility
  CFDR
  NSS
  Evaluate the portfolio manager’s performance
  
  Practice
  

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  Analysis of abnormal return
  by E. Fama
  If NSS > 0, the portfolio manager was effective: he/she “added up” to the portfolio return.
  
  If NSS < 0, the portfolio manager was not effective: he/she “ate up” some return.