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Investment Management - Science topic

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The literature on the subject is very poor. As a result, many companies use inappropriate methods, which are based on fixed cost sharing.
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The contribution margin per unit (MCU) is the best product profit metric.
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What are the best policies to encourage partnership between the public and private sectors in the field of investment, and how can these policies be profitable for all parties?
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You are most welcome dear Othmane Touat . Wish you the best always.
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Already at least several commercial banks have created their own cryptocurrencies. Some investment funds invest part of their assets in selected cryptocurrencies. Recently, the investment bank JP Morgan has created its own cryptocurrency JPM Coin. Cryptocurrency JPM Coin will be used to settle initially a small part of the transaction, which JP Morgan performs on a daily basis for a total of about USD 6 billion.
Thanks to JPM Coin, settlements between business partners should take place immediately, ie much faster than the current standards of transfers. However, apart from accelerating the time of the transaction, what are the other goals for banks to introduce their own cryptocurrencies?
Could investment banks create a new type of collateral for transactions in the event of a possible strong loss of the USD dollar in the event of another global financial crisis connected with the currency crisis? Such a risk exists if the problem of growing public debt in the US is not resolved and banks in China cease to buy US Treasury bonds.
Do you agree with my opinion on this matter?
In view of the above, I am asking you the following question:
For what purpose do banks create their own cryptocurrencies?
Please reply
I invite you to the discussion
Thank you very much
Best wishes
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Recently, there is a tendency to affirm that bitcoin will not be admitted as a payment currency for an “ecological” reason, that is, due to the high energy consumption that mining the cryptocurrency carries. At the same time, it seems that clients of investment banks no longer have the same interest in cryptocurrencies.
See the following link:
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How does one make their marketing mix be more agile to new channels, ever changing environment. what are the models used for this analysis and their interpretation.
our paper on MMM- complex models and interpretations to discuss the advertising effects, models- simple and complex to collate it all together.
Please read, review and suggest how we can add on to enhance our research going forward
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Well, intereyting approach, although I personally have a problem with "econometrisation" of marketing.
I like new perspectives on basic marketing concepts, for example SAVE concept instead of classic 4P
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Kindly share your experiences if you have any idea and experience regarding bitcoin.
Thanks
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Bitcoin is nothing more and nothing less than unlicensed gambling.
Details are in my book: Bitcoin: The Mother of all Scams. https://www.amazon.com/gp/product/B095NMLM2F
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Do you know scientific publications describing the methodologies of the analysis of development potential and creditworthiness for investment projects planned for implementation by an innovative start-up?
Please reply
Best wishes
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During the SARS-CoV-2 (Covid-19) coronavirus pandemic, the level of lending, i.e. the scale of loans granted, decreased in many banks due to the decline in economic activity of many enterprises. Despite the decline in lending, banks have not changed their credit policies applied to innovative startups, which still find it difficult to obtain a bank loan for the development of innovative business ventures in which new business concepts, new technologies and new solutions are applied in the scope of conducted or planned to start-up operations economic.
Greetings,
Dariusz Prokopowicz
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Are the supra-national investment investments in investment banking an important factor in the ongoing process of economic globalization?
If the increase in the scale of transnational investment investments in investment banking is faster than the rate of economic growth of the countries expressed, for example, in the Gross Domestic Product, is this the way in which economic globalization can generate additional systemic credit risks?
If in the context of these processes the diversification in profitability and income between investment banking and other types of financial institutions and non-financial business entities increases, can this situation be one of the symptoms of increasing systemic risk and the probability of the next global financial crisis appearing in the next several years?
Please reply
Best wishes
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اعتقد ذلك... ولهذا أهمية وأثر كبير في هذا الخصوص
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The Data is for Academic Research
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Thanks
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In your country, do banks cease to finance investment projects related to traditional energy based on the burning of minerals?
Do banks start to finance environmentally friendly investment projects in your country, thus supporting the processes of transformation of the economy towards the implementation of sustainable pro-ecological development?
Please, answer, comments.
I invite you to the discussion.
Best wishes
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Dariusz Prokopowicz till now, Iraqi banks could not launch such projects. The reason behind that is business environment in Iraq, where no eco-friendly project.
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What kind of analysis of economic and other data provides better knowledge for investing in securities listed on the stock exchange?
Which analysis, ie fundamental or technical analysis, provides better knowledge for investing in securities listed on the stock exchange?
Thanks to which analysis, ie fundamental and technical analysis, investors achieve the best results in investing, the highest returns on investments in securities listed on the stock exchange?
Which investment strategies are the most effective? Are the most effective investment strategies based on conducting fundamental or technical analysis and maybe on a specific combination of both types of analysis?
Please reply
Best wishes
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It depends on what type of investors you are. For long-term, you need to know the fundamentals while the short-term traders look at the technical analysis patterns. These patterns reveal what is happening in the company currently. Fundamentals are behind the curve in most investment decision. We need some current indicators and the volume and price are more sensitive to B/S and P/L.
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I want to pursue phd in investment banking and management field and looking for taking admission in certain universities. They are asking me to write a research proposal before taking admission. Can you please suggest me more specific topic area‘s which need to research and make my phd worth while for my career.
i am very Thankful to everyone , thanks
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The easiest essay to write would be to speculate about how, in the next decade or two, AI and cryptocurrencies are going to change the structure and activity of these industries and the ways they will be regulated and policed.
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Most prefered:- Investment optimization as an extension of Unit Commitment for a Portfolio consisting energy generation Units.
- Unit commiment
- Investment Optimization
- Economic dispatch
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Mixed-Integer Linear Programming,
Exact algorithm
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Try find and read recommendation about project portfolio planning from PMI Standard for Portfolio Management (overview is available at https://www.pmi.org/learning/library/pmi-standard-portfolio-management-8216).
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The project is to maximize the Net Present Value of Heat generating power plants in a District heating system.
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Here are some arguments for/against some of the methods:
1) For the PV approach and perpetuity, you would need a discounting rate. The assumption of a constant discounting rate is often not true. In the case of power plants, you would probably discount some benefit amount in dollars (which is a random variable) with some interest rate (a random variable as well).
2) The PV and perpetuity assume that the power plant will not burnt down (during n periods or in perpetuity), which is surely impossible. Any potential risk and uncertainty are usually assumed to be zero in both of the methods.
3) Often these projects are decided by politicians, who cannot think over their legislation periods. So perpetuity method is surely not ideal for these particular cases.
4) Annuity only shows information from one single period and hinders differentiation between high-risk and low-risk investments.
5) Assuming risk and interest rate volatility are not issues, perpetuity shows the net asset value the best. Ownership can be transfered at any time with the same price. PV would assume that the power plant will be priced with 0$ after n periods.
In short: Each approach has assumptions. You may prefer one to the other, if you are sceptical about the assumptions in your case. On the other hand, if you do not take any assumption, your calculation may only contain minimal information.
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- Using Mixed integer liner programming.
- I need to determine the optimal timing to invest(maximizing Net Present Value) in district heating power plants and at the same time minimizaing Carbon emissions.
- Main constraint: coverage of a given heat demand.
- Investment decision through mixed integer linear programming.
- Investment optimization as extension of unit commitment. (schedule optimization)
- Deterministic approach.
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Thanks a lot Mr. Temitayo Bankole !
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1) Main constraint: coverage of a given heat demand.
2) Investment decision through mixed integer linear programming.
3) Investment optimization as extension of unit commitment (schedule optimization)
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IRR and NPV are best suitable methods
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Does anyone have research insights on whether Millennials and their investment needs and habits differ from those of their parents? And if so, how they differ?
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Is it possible to heal the banking banking supervision of corporate investment banking to significantly reduce the dramatic effects of the next global financial crisis for the national economy and society? Is it too late for that?
Of course, this question should be answered in the negative, that it is never too late to repair the operation of any system that is supposed to serve people. But whether the scale of mistakes made in the past has not generated the unavoidable pursuit of a global financial crisis that is even more dramatic in the negative consequences for entire economies and societies. A crisis that will start with the spectacular collapse of one of the largest financial institutions, a bank or an investment fund. A globally operating financial institution that will lose playing "poker" on international capital markets with other investment banks. Some of these others earn from this crisis by winning this "global poker" and real economies will again plunge into a multifaceted economic crisis, debt crisis, a period of deep recession, rising unemployment and falling income of citizens. Is the capital flow in this way through these games, games in "global poker" on the capital markets played between the largest investment banks is economically effective? Well, it is not an economically effective process, it is a process harmful to economic development. So why are these games in "global poker" conducted? Is it only because in the process of excessive, secondarily realized liberalization of supervisory standards over financial systems implemented in the 90's, allowed to create too large, increasingly globally and monopolistic investment banks? In my opinion, not only because. Not only the scale of operations, not only the large share of capital compared to the financial system and the entire economy is a serious threat and a crisis-generating factor. Also important are the elementary rules of risk management, which are forgotten, ignored at certain organizational levels of the financial institution or financial system management.
Analysis of the origin of the next global economic crisis
Currently, forecasting systems are being developed regarding forecasting future trends of economic processes based on various analytical, not only economic, determinants. Personally, I also support the thesis about the impact of various cosmic and atmospheric phenomena on various events that take place on Earth in the field of economy, economics, politics, etc. On the other hand, because sources of the global financial crisis I mainly researched in terms of progress (or rather lack of it) ) in the field of improving the credit risk management process, implementation of modern IT solutions streamlining these processes, filling gaps in legal regulations developed in financial supervision institutions in relation to technological development of transactional, corporate and investment banking, creation of new derivatives etc., so I add to this type of analysis the issue of the analysis of the process of improvement of systemic management, banking credit risk. Unfortunately, the strong investment banking banking lobby influencing the politics of the world's largest economies is accepted by the government establishment, because monetary policy, periodically regulated lending policy, increasingly liberalized, transactional modernization, electronically and disseminated investment banking are areas treated as "universal magical tools" that can be used as a determinant for economic growth as part of state intervention. In this respect, there is a lack of full information flow in the area of ​​growing credit risk and the fast approaching new global financial crisis between the transactional level of sales of banking products and the level of monetary, credit and financial system security at national and supranational level. According to the demands of the classical economy, liberalism at the transactional level of the sale of banking products should not be limited by state intervention at the level of the entire financial system. But the exception in this regard is the issue of the security of the financial system. If, secondarily, the extremely liberalized principles of systemic security periodically lead to an increasing financial crisis in investment and credit banking, why should the costs of these errors be spread across entire economies? Why is it that investment banks in economic crises, which often cause them to earn money from them, and the costs are repaid by entire societies, people lose their jobs and many years of experience of their lives? Therefore, because these investment banks have genuinely monopolized the systemic credit risk management system. They no longer serve the economy, but try to shape economies according to their investment strategies. The question that now arises is whether this harmful and crisis-provoking process can be reversed, corrected before the emergence of the next global financial crisis? Is it already too late and only one of the next financial crises, which will lead to the collapse of not one but a few major banks and investment funds will make it possible to repair damages resulting from errors that politicians began to make in the 1990s liberalizing then secondary issues of banking supervision systems? If it is only in the situation of the next global economic crisis, then how dramatic are the consequences for entire national economies, for societies, for people? It is not easy to predict this issue, but it is almost certain that it will be very dramatic, above all economically and socially, but perhaps also politically, strategically and militarily for many countries.
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Risk management is one of the major issues.
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i have a data of stock prices in daily frequency. i want to study the relationship of stock price(or returns) with select macro-economic variables. the macroeconomics variables are in monthly series.
so, i have to make the daily frequency of stock prices as monthly frequency.
if i calculate average, i doubt whether it will be representative or not, becuase of the longer time period(ie., one month) and during the month, there may be some extreme values in the distribution
what the the appropriate method in this regard?
thanks in advance
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Take the volumes traded & arrive at the weighted averages.
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How to compute annualized return
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Md Zakir Hussain ' s answer is right.
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if a company declares buy back of shares, what type of signals it provides to the stock market.
if promoters also participate in the buy back, does it indicate negative future prospects of the company?
thanks in advance.
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A buyback of shares indicates that the company has excess funds for which they do not have any immediate profitable investment opportunity available. At times, there is nothing more to be read into a buyback other than the company's intention to use such funds for repurchase rather than payment of dividends. Since buyback reduces the capital base, it will increase the EPS & DPS even with same amount of profits. Also, since buyback is often done at a premium to prevailing market price, a high premium sends signal to the market that the company perceives that its shares are undervalued.
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can anybody suggest a best seminal works on the relationship between macroeconomic variables and stock price?
thanks in advance
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Hi Jasman,
It may be worth checking also country-specific research (in addition to the APT suggested in the first response). This is due to the fact that influence will differ across the world. You can have a look at the following for example:
Best regards,
Veneta
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how to understand intuitively the Inter-temporal CAPM model? what is the appropriate econometric model to empirical test the inter-temporal CAPM model?
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hi,
I thinks the following links and articles can be useful
Merton, R. C. (1973). An intertemporal capital asset pricing model. Econometrica: Journal of the Econometric Society, 867-887.‏
Stehle, R. (1977). An empirical test of the alternative hypotheses of national and international pricing of risky assets. The Journal of Finance, 32(2), 493-502.‏
Jagannathan, R., & Wang, Z. (1996). The conditional CAPM and the cross‐section of expected returns. The Journal of finance, 51(1), 3-53.‏
CHEN, N. F. (1983). Some empirical tests of the theory of arbitrage pricing. The Journal of Finance, 38(5), 1393-1414.‏
Dempsey, M. (2013). The capital asset pricing model (CAPM): the history of a failed revolutionary idea in finance?. Abacus, 49(S1), 7-23.‏
Machado, O. P., Bortoluzzo, A. B., Martins, S. R., & Sanvicente, A. Z. (2013). Inter-temporal CAPM: An Empirical Test with Brazilian Market Data (CAPM Intertemporal: Um Teste Empírico Utilizando Dados Brasileiros). Revista Brasileira de Finanças, 11(2), 149.‏
Good Luck
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what are the real life applications of Arbitrage Pricing theory?
In other words, How an investor can make use of the theory to get arbitrage profits.?
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Yes my understanding is that there are two things. one is the arbitrage opportunity in the spot market where the parity conditions are not satisfied and the same thing is traded at different markets and investors those who are alert can capitalize. The other is the arbitrage opportunity in the investment market where the expected return is not equal to the factor values and factor sensitivities.In other words when the asset is over/under priced which is arrived at on your analysis and can be used to make investment portfolios.
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I would like to undertake a research on empirical testing of international CAPM. how to develop the methodology for testing international CAPM.
can you please suggest best guiding articles on international CAPM?
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Dear Srikanth:
Abbreviated CAPM methodology
After the review of the suggested literature above.
Please choose the appropriate risk free (Rf) instrument, i.e. Government Bond and whether this variable (the constant or intercept in the CAPM model) will affect the return of a given financial asset (Ri - Rf) or be part of the estimation per se (Rf +(ErMkt-Rf)*β).
Make sure you use the same frequency on data: daily (suggested) or monthly. If you employ daily frequency for company and market returns you may use LN returns, bond yields are usually expressed as EAR, therefore don’t forget to transform them into daily returns.
All the best,
Oscar.
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I am writing my masters thesis on Behavioural Finance, more specifically on how Twitter can be used to predict the return of stocks. Firstly, I am aware that this has already been proven in other literature, therefore I trying to decide how to do this in more detail so that my thesis provides added value. Secondly, I have recently discovered the sentiment analysis that Bloomberg provides, however I would like further guidance as to how I can use this information for my thesis.
I would like to understand the exact uses of the Bloomberg sentiment analysis, as then I would find it easier to decide upon a specific thesis question.
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Hi, I think that this working paper could be of interest for you.
Best wishes
Anna
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The focus of my research is on creating three forms of overconfidence suitable for hedge fund managers.
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Hi,
You may have a look to this paper: 
Reviewing the hedge funds literature I: Hedge funds and hedge funds' managerial characteristics
nternational Review of Financial Analysis, December 2016,Pages 85-97
Izidin El Kalak, Alcino Azevedo, Robert Hudson
Best regards.
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Research and studies about Investment Law in Afghanistan after 2004.
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I am need of investor perception related literature for my research project which will help me to refine the research constructs.
Please let me know 
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Thank Mo Sherif
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please suggest some construct to the the relationship between human rationality in investment decision and  EMH 
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Dear Dr. Dhani,
First off I would start with the fundamental assumptions of the EMH. Please note that there are many different versions of this. The most extreme is the so-called perfect competition. Another interesting theory is called complete markets. All of those have different assumptions.
Second, when we talk about rational investors, we must clearly define their utility function. During my research on capital structure transactions I constructed a microeconomical model which assumes a simple utility function calculated as the IRR of the expected cash flows resulting from the transaction.
However, one can go any number of levels deep in order to calibrate the utility function. E.g., in my model it would be trivially easy to construct a preference within the utility function which would additionally account for a gross cash-on-cash multiple from the investment, as well as the time required to exit the investment and the risk profile of the corporation's economical and financial performance.
I know this may all sound very abstract, but in order to construct a good theory one first needs to start with the assumptions and then validate them against microeconomical historical facts, as well as the legal and fInancial frameworks of the modern economy.
In case you wanted to discuss this on a more detailed level, I am always open for discussion.
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what theories can define the relationship between financial literacy (measured by its three components: knowledge; behavior and attitudes) and investment decision?
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Dear Hajaj,
I am doing research on the related topic, that is financial literacy and its impact on retirement planning. Can you guide me for the questionnaire
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Yes, The insurance company may pay a premium for buying policy in their bad days and supporting them morally, socially, and economically. It has happened in Japan, A little research on Japanese Insurance Industry would help.
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The Enron case. How could such a prestigious investment  bank advise investing when the quotations of the shares were falling?
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hi - watch the great movie on youtube i've shown students - search "enron smartest guy in the room full movie" - it was that the investment banks and their analysts did not want to damage their relationship with enron, so were a bit loose with the truth. re the movie, grab some popcorn and enjoy!!
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media coverage and analyzing news affect people reaction to and new news.
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Dear all,
Yes,   type of media (financial news or political news)  affect stock market movements.
Best regards
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What is the behavior of a "high-hedging needs" firm at refinancing points? What about its profitability impact on the financial package it will choose/ accept from the bank or the market? Do you know papers on that subject?  
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Financially constrained firms are expected to exhibit higher investment  or growth sensitivity to cash-flow than non-constrained firms.  This is the standard approach at least, and there is a lively debate still ongoing to a large extent.  You can find an overview with some important references here  in one of my papers... but there are of course many others you can look at. 
Cheers
Massimo
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Looking at SAS code examples, including one from WRDS, suggests that it’s simple returns. The reason I ask is because I plan to regress the monthly returns of gross profitability/book-to-market portfolios, using CRSP returns data, against the factors and I would like to make sure my returns are in the correct form.
Thanks
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Two issues arise that you might wish to further consider.  First, the distribution of the returns.  If the simple returns are skewed then a ln form might be more normal.  Second, the longer the time interval over which the returns are calculated the greater the difference between simple and log returns due to the continuous compounding effect.
While the original studies were based on simple returns there does not seem to be anything in the modelling or maths that preclude the use of ln returns. 
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The CDS markets portfolios (sensitive to credit events) construction is important especially for banks and investment management. Can we use VAR measure to assess the risk of such portfolio? if yes, what could be the possible practical implications of VAR for CDS portfolio? 
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VaR are inherently for products with risk of credit or price loss, but as Sergei mentions we are intuitively pricing the insurance premium on the improbability of default and adding back costs to get premium.
Premium = EL + Costs of contracting + costs of funding loss capital provisions (if any)  
This 99% improbability of loss would indeed have been VAR but we are already using it to price the insurance, thence you would not be able to provide  VaR based capital for it but provide the entire pool premium to the loss event per se and realise profits when the event does not happen.  You could indeed use a quasi VaR EL methodology to price the insurance.
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Am trying to use Sharpe and Treynor's ratio but will welcome any suggestion and if possible sources and or market data not older than 2013.
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Sorry to correct here, but the Sharpe ratio does not use beta, it is excess return over standard deviation.
The most widely used measure is (Jensen's) alpha. In its simplest form it is the intercept of a regresion of the fund's excess return (fund return minus risk-free rate) on the excess return of an appropriate equity index. This approach can easily be extended to multi-factor models. Alpha then is the intercept in a regression of the fund excess return on the market excess return and the other factors (e.g. the Fama/French or Carhart factors). The factors are defined as the returns on zero net investment portfolios (small minus big, high minus low book-to-market ratio, past winners minus past losers). In case you use German data (I conclude that from you affiliation): Factor data is available on the homepage of the centre for financial research at the University of Cologne.
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I have tried searching for semi structured and closed questionnaires in the following websites; ERIC, NEBRASKA RESEARCH INSTITUTE - US, TIP, EBSCO and DISCOVER but I could not find an instrument with credibility and reliability for purpose of Generalization with a high CRONBACH ALPHA.
I will appreciate any assistance. Thanks
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I am strongly agree with the answers of Prof.Julia B. Smith.
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Measuring environmental, social, ethical and governance aspects.
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Maybe the Q Methodology (and Q-Sort Technique) could help you.
It "combines both qualitative and quantitative research and is used to examine complex subjective structures like opinions, attitudes and values." We have been using it to measure attitudes towards environmental and social issues in our Social Psychology Research Group at LAPSI-USP (Sao Paulo, Brazil).
You can also add to it a software analysis, like SPSS - Statistical Package for the Social Sciences, which needs the help of a good computer and statistic  expert.
Here goes a few classic references, just in case:
STEPHENSON, W. (1935). Technique of factor analysis. Nature 136:297.
Norman H. Nie, Dale H. Bent, C. Hadlai Hull. SPSS: statistical package for the social sciences. McGraw-Hill, 1970.
MICKEOWN, B. & THOMAS, D. Q Methodology: Quantitative Applications in the Social Sciences. Iowa (USA): Sage University. 1988.
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I'm in a stage of preparing my dissertation for an MBA. I'm a little confused about the topic and research question. I'm seeking a topic that combines both marketing and finance (CF) or investment management.
Can you please by referring any related literature topics, dilemma, problem?
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Dear Mr.Ahmad Tamimi,
You should select a research topic from your Research Gap only. Research Gap consist of your Broad area of topic like marketing &  finance or investment management, etc.,. 
Regards.
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Not true.
Naive diversification is combining assets into portfolios randomly and ignore correlation. In contrast, Markowitz diversification is combining assets with correlation coefficients.
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Naive diversification rest on the assumption that simply investing in enough unrelated assets will reduce risk sufficiently to make a profit. Alternatively, one may diversify naively by applying the capital asset pricing model incorrectly and finding the wrong efficient portfolio frontier. Such diversification does not necessary decrease risk at a given expected return and may in fact increase risk.
Markowitz diversification occurs when one uses mathematical models to find the stock to place in portfolio such that the portfolio has the highest possible return for its level of risk. One may engage in MArkowitz diversification when one wishes to increases or decreases one's portfolio's risk, or when the portfolio was previously not diversified.
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I am looking for qualified scientists to participate as a guest on my new, internet video series of interviews with researchers working in areas related to financial markets.
The interview will focus on your research. The length of the interview can be flexible, depending on your time availability and the subject matter covered. A short interview could run for ten minutes. A longer one might last for an hour or more. As we are separated geographically, the interviews will be conducted via Skype.
If it will be helpful, graphic images can be inserted into the interviews.
The video series is named after my Kindle book series, The Alpha Interface: Empirical Research on the Financial Markets, about which we have previously corresponded. In fact, the first four interviews – conducted with Peter Hafez, Director of Quantitative Research for the data provider RavenPack – are now online. You can view them at http://www.alphainterface.com/blog-and-video-interviews/.
While this is a new venture for me, I hope it will put you at ease to know that I do have an extensive background as a television interviewer. My television interview series, Thinking Allowed, was broadcast on public television, throughout North America, on a weekly basis for fifteen years. It focused on topics related to philosophy, psychology, health and science. Excerpts from those interviews are available at http://www.youtube.com/user/thinkingallowedtv These videos have been viewed on the internet more than two million times.
My goal in producing the video series and the Alpha Interface books is to help educate the many people with an interest in the financial markets as to the significance of empirical research.
If you are interested in participating as a guest, please email or point me to some of your research papers. I am located, incidentally, in the Pacific Time zone. I expect to be conducting these ongoing interviews throughout the coming year.
Sincerely,
Jeffrey Mishlove, PhD
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Hi Jeffrey
I trade on the Australian Stock Market and have pushed a few papers on trading stocks in the Australian Market.
Have a look at my publications, and let me know whether I qualify for your TV interview.
I look forward to hearing from you soon.
Kind Regards
Carol
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Contruction of mutual fund portfolio and validating its consistency in different market conditions.
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A good starting point is Fama-French 3-factor model. Time-series are available on their website.
BR
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Alpha is a risk-adjusted measure of active return on an investment.
The FF 3 factor model is emerging 2 classes of stock with CAPM to reflect a portfolio's theory.
r - Rf = beta3 x ( Km - Rf ) + bs x SMB + bv x HML + alpha
Alpha Coefficient can show that in an efficient market, the expected value of the alpha coefficient is zero. Therefore the alpha coefficient indicates how an investment has performed after accounting for the risk it involved:
Alpha_i < 0 : the investment has earned too little for its risk (or, was too risky for the return)
Alpha_i = 0 : the investment has earned a return adequate for the risk taken
Alpha_i > 0 : the investment has a return in excess of the reward for the assumed risk
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Absolutely. Take the case of a portfolio. The measurement of alpha with CAPM assumes that a portfolio is (1) passive and (2) similar in style and value as the "market." In this case, a significant negative or positive alpha can be a distortion. For example, if (1) your portfolio is more value-oriented than the "market" and (2) value stocks have overperformed growth stocks during the period of evaluation, your portfolio alpha is overestimated. Now, if you orthogonalize alpha for value and size biases, then your measurement of "excess return" is more refined. Momentum (Carhart) and market timing are also factors can be added. In fact, professional (commercial) factor models like MSCI BARRA use up to 8 or 10 risk factor groups comprised of 100s of risk macro components (liquidity, confidence, volatility, trading activity, etc.).
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Especially if this is a multi-factor model.
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Yes, I agree. Fama and MacBeth regression seems to tell us that we can get more accurate risk premium than original factor return. And thus we should use the cross section results as 'real' factor return instead of the original ones.
It is a pity that we cannot get the original factor returns from betas, which I have planned to do.
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What are the pros and cons of it?
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Its traditional knowledge that equity financing is better for volatile business. The reason behind it that equity is permanent in comparison to debt which needs to be return after a fixed period. Thus even if situations are bad u dont have to return money in case of equity but have to so in case of debt. But the Debt financing is cheaper and thus help in reducing some extent of volatility and reduce risk
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I would like to apply the Sharp ratio to compare between a two portfolios. I don`t have the standard deviation but the default probabilities.
Can I apply the default probability instead of standard deviation or I need to apply some type of transformation function on the default risk, that would approximate it to a standard deviation.
Thanks!
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ISSUE
This question is concerned with applied statistics in finance. The question asks: can the default probability be used as a substitute for standard deviation of the portfolio? The short answer is no because the default probability measures the probability of default and does not measure the dispersion of returns of various assets that has positive number, i.e. non-default.
SHARP RATIO
The Sharp ratio is a tool to assess the performance of an investment by adjusting for risk. It measures the excess return per unit of deviation from the expected return adjusted for risk. The S-ratio is given by:
(1) S-ratio = [E(R - R(f)] / Sqrt. Var(R)
… where E = expected; R = return of assets in the portfolio; and R(f) risk free rate in the portfolio.
The denominator is generally given as: Sqrt. Var(R – R(f)). However, if the risk free rate is constant---i.e. 20-years US bond would be constant for the duration of the portfolio assessment, then the denominator is reduced to just Sqrt. Var(R).
If there are 2 portfolios from the same market and the risk free rates in both portfolios are constant, then the arithmetic mean of both portfolio is equal to R; thus:
(2) R = (R1 + R2) / 2
The standard deviation may be derived by taking periodic returns record of both portfolios, i.e. every 3 months, or six months or annually, then run a pooled standard deviation.
(3) S(pool) = [df1(var1) + df2(var2)] / df1 + df2
… where df1 = number of periods for portfolio 1 minus 1: (n1 -1); var1 = variance of the returns for portfolio1; df2 = (n2 – 1); and var2 = variance of returns for portfolio 2. By substitution:
(4) S(pool) = sqrt. Var(R)
Put this value into equation (1) the S-ratio could be solved with known risk free rate for the portfolios. If both portfolios do not have risk free rate, say all assets were stock issues, then R(f) = 0.
The comparison is S-ratio1 and S-ratio2, this could be done by the usual comparison study:
Z = [(x^1 – x^2) – (mu1 – mu2)] / sqrt. (S1/n1) + (S2/n2)
… where x^1 = mean return of portfolio-1; x^2 = mean return of portfolio-2; mu1 = expected return of portfolio-1; mu-2 = expected return of portfolio-2; S1 = standard deviation of portfolio-1; S2 standard deviation of portfolio-2; and n1 & n2 are the size of returns periods reading for the assessment. Appropriate significant level may be set for Z. See Z-table.
The test above may be verified by homogeneity test under d-bar analysis. However, if the length of returns are not equal: n1 not equal n2, then d-bar analysis may not be appropriate for lack of perfect pair matching.
DEFAULT PROBABILITY
The default probability is the probability of non-payment by asset elements in the portfolio. This probability may be part of the standard deviation of the portfolio return; however, it cannot be used as a substitute for the standard deviation because the standard deviation includes the dispersion of defaulted and non-defaulted returns from the mean.
Assume that the question of default and non-default is looked as in terms of binomial probability, i.e. pay or non-pay which is equivalent to success & failure in the Laplace or Bernoulli’s binomial probability. The default probability is the probability of failure: P(f) which is: P(f) = 1 – P(s), i.e. 1 minus the probability of success. The probability of success is given by:
P(s) = (s + 1) / (N + 2)
… where s = number of success observed; and N = total observation.
The number of success (s) in this case would include Sharp’s R (return on regular issues) and R(f) = return of default free issues. See above for standard deviation.
This Bernoulli-Laplace approach is only a short hand to see the categorical probability of Yes | No on the issue of default. It cannot answer the question of which portfolio performs better.
REFERENCES:
Sharpe, W. F. (1966). "Mutual Fund Performance". Journal of Business 39 (S1): 119–138.
Scholz, Hendrik (2007). "Refinements to the Sharpe ratio: Comparing alternatives for bear markets".Journal of Asset Management 7 (5): 347–357.
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I have a model on the determinants of the private investment.
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There is slight difference between the fixed capital formation and private investment. The private investment can only produce extra profit for the private investors such as fixed capital land, raw material in fixed quantity and fixed machinery and other inputs but public investment extra add to national production.
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Generally, how do you predict or measure investor behavior / reaction to some new financial information in the behavioral finance framework?
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The AARI collects and publishes [free] this weekly sentiment indicator..many academic studies have utilized the index and its volatility to build lead-lag models... you can even download past data in .xls format. Hope this helps in your model building
Cheers!
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Although CAPM is the most popular method, determining beta values is a problem. There are stocks which are thinly traded or are not listed. Although applying a levered/ unlevered beta is an option, one also has to find a control group of stocks, which can vary from one stock to another because of industry, size etc. So, is there a more effective method to determine the cost of equity for firms instead of CAPM?
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While the CAPM pretty much necessitates a return history [to estimate betas] it offers a quite robust estimate of the cost of equity, assuming the equity market risk premium is also known (Rm-Rf). Since the author of this question [Chandra] wants to explore non-beta alternatives, one can look at the Gordon DDM [dividend discount model]...where Ke= (D1/Po )+ g ... thus all you need is information wrt next period dividend, current price and the growth rate of dividends. Note that D1=D0(1+g). This is the beta-free way to estimate Ke. Hope this helps, cheers!
PS: for estimating issues related to Beta you can see the abstracts of my PRJ papers on ETF betas. Research on EFs is my special interest.
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The black swan theory or theory of black swan events is a metaphor that describes an event that is a surprise (to the observer), has a major effect, and after the fact is often inappropriately rationalized with the benefit of hindsight.
Black Swan : The Impact of the Highly Improbable- Nassim Nicholas Taleb
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Olaf,
I agree energy or access to reliable energy is sometimes under appreciated (why the Japanese attacked Pearl Harbor - because the US Pacific fleet was the only real threat to the oil out of south asia) but not unexpected . . . so is not quite a black swan.
One interesting 'cost' of modern globalization - due to population migration and travel - that I think might be classified as 'unexpected consequenses' is the reintroduction of diseases which had previously been eradicated from numerous states. This coupled with the relatively recent findings that immunizations don't last indefinitely has many in the health community very nervous. This observation will be ignored (or fought - remember aids in Africa a decade ago) by many governments until it starts infecting their individual family members and friends. Then they'll try to hold the wrong people responsible; my favorite recent example there is the 7 Italian geologiest that are now serving 6 year prison sentences for not predicting a big quack that killed 300 people in L'Auila, Italy. I'm sure all this is related to oil somewhere.
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Can experiments be used to study long term group decisions of organizations?
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It would be great if Paul Ojeaga could actually give some examples of the many studies in this area that he is aware of.