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Dear scientific community,
I would be very interested to hear your input regarding the scaling-up of LCA studies to a portfolio level. I know there is a plethora of product LCAs and plenty of them consider several individual products or product variants in parallel. However, I have not found an awful lot of studies that extend to several hundred, let alone thousands of individual products within the scope of one study (as opposed to equally as many individual case studies).
Surely, more people have approached this apparent research gap. So for anyone that has been active in this area: I would greatly appreciate you sharing what experience you have made or you pointing me at any related publications in the field.
Many thanks and best regards
Tobias
P.S: If you are interested what my colleagues and I have done in this field, feel free to check this framework article and the case study we presented at LCM 2021 conference:
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Tobias Manuel Prenzel Cradle-to-gate is an evaluation of a portion of a product's life cycle from resource extraction (cradle) through factory gate (ie, before it is transported to the consumer). Cradle-to-gate evaluations are occasionally used as the foundation for business-to-business environmental product declarations (EPDs).
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I'm replicating Fama-French five factor mode. I have formed factor portfolios. I'm not sure how to the average monthly percent excess returns for portfolios. In other words, I want to get the Table 1 in their paper. 
Thanks in advance
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I would like to investigate some areas in Project/Progaram or Portfolio management to an extent of creating a review paper.
I am also open for areas in risk management, scheduling managemnt and Work Breakdonw Structure.
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In order to search for a research topic, you may want to do the following: search on Google Scholar, and write the words, say "Project/Progaram or Portfolio management" or any other topic you want to write about. You will get many papers talking about such topic. Try to skim through these papers (especially their Abstracts) for 2 main reasons: 1- to see what has already been written about the topic, and 2- to check for the research gap/gaps that you want to cover in your study. This is a start. By the way, you may want to keep such relevant research papers to use them as references in your research. You may use the latest papers published about the topic.
The above is to do a study on a certain topic. For review, you may want to collect relevant papers, put each paper's own findings, and put your views upon each of these findings. There are certain guidelines for writing review papers; you may check some of these well-written review papers. Again, always check Google Scholar for good papers.
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I am working on portfolio optimization using lower partial moment of order 1, can someone help me how to implement LPM-1 in excel sheet using "tau" as my threshold value as 0.00% and order (n) as 1.
Thank you all in advance for your contributions to my question.
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Curious to know how Art as an alternative asset can be included in an investor's portfolio to generate significant alpha (if possible); and how & to what extent can this asset be fully maximised as a hedge or diversification tool?
Understand that this is a relatively new area with limited historical prices available for further analysis and research, but I am highly curious as to how Art can potentially be used as an investment tool.
I'm open to further reading on this topic! If anyone has solid research materials to share with me—please do!
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I am keen on venturing into art portfolio management, specifically including Art as an asset into financial portfolios, and not just pure-art portfolios.
I'd like to know how I can begin analysing and tracking the performance of an Art-inclusive investment portfolio? Will traditional models be suitable/optimal for this?
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Try this from CFI
Certainly a good question on exotic objects like art and bitcoin. Valuation is both an art and a science. The valuation models in finance will need to be modified to accommodate parameters like demand and liquidity.
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What is the best way to construct investment portfolios: based on asset prices or based on the changes in asset prices through time? E.g., if Asset A is 55 in 2010 and 60 in 2011, should I use 55 and 60 as data points or should I use 5 (i.e, 60 minus 55)? Thank you in advance.
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Jan H Jansen there is a chapter on "Fractionally Differentiated Features" in Lopez de Prado's "Advances in Financial Machine Learning". It deals with the trade-off between making time-series stationary by using returns and the memory-loss that is generated by doing so.
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Hi everyone,
I am planning on constructing a Fama french 3 factor model for a period from 1.1.1998-31.12.2015 for a portfolio of about 120 stocks. I have collected the monthly returns for each stock over 36 months since their IPO. The process of doing a Fama french 3 factor model for a single stock is very straight forward as seen in this video: https://www.youtube.com/watch?v=b2bO23z7cwg
However, how should I proceed with a portfolio with returns that all have different starting dates (as each firms have a different IPO date)?
My tough was as follows:
  1. Calculate the average 1 month return, 2 month return,, 3 month return, ….36 month return from all the stocks in the portfolio.
  2. Calculate the 1 month average, 2 month average, 3 month average, ….36 month average of the Rf, HML, SMB, Mkt-Rf
  3. Subtract 1 month average Rf from average 1 month return, repeat until the 36th month.
  4. Proceed with running the regression.
Many papers, such as the one by Levis (The Performance of Private
Equity-Backed IPOs), have used the Fama French 3 factor model but do not explain the mechanics behind the process.Any help is more than appreciated.
Any help is greatly appreciated
-Sebastian
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Hello, I have writing research does ESG factor impacts stock's market return. I am conducting this research with three factors of the FAMA french model and the fourth-factor being ESG factor.
(Stock Return-Rf) = b0 + b1 (RM- Rf) + B2 HML + b3 SMB + B4 ESG + e
I want to create this analysis at the market level.
I can create this model at the individual stock level, however, I am unable to use this model at the market level because, fame french three factors are constant for all the stocks, so I can't select it as my independent variable.
Dependent Variable:
  • Stock returns - 60 companies stock's yearly returns.
Independent Variable:
  • Market factor (CAPM): FTSE 100/S&P100 - However, market returns would be common for each stock. So, this variable is not changing with each stock as the market return is common for all stocks. 
  • Firm Size (SMB): I can calculate the SMB factor using six portfolios formed using Size and Book to market value. However, this factor will also be common for each stock. Hence this variable is not changing as the change in the dependent variable.
  • Book to Market Value (HMB): I have calculated the HMB factor using six portfolios formed using Size and Book to market value. However, this factor will also be common for each stock. 
  • ESG Factor: I have an ESG score of all stocks for five years. Now, this factor is changing each year with a change in stock returns
Is it possible to use FAMA french factor at market level?
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Hi everyone,
I am writing this to gather some suggestions for my thesis topic.
I am a student of MSc Quantitative Finance. I am in need of some suggestions from the experienced members for a research topic in Portfolio management.
My expertise are in statistics and empirical analysis. I believe that I will be able to present some good work in field portfolio analysis. Currently, I am researching for some good topics where I can apply machine learning or machine intelligence e.g. for forecasting portfolio performance or may be use it to asses portfolio optimization strategies.
I will be very grateful for you suggestions and guidance. If it suits you, you can also email me on narendarkumar306@gmail.com
Regards.
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Topics
  • Behavioral Finance ...
  • Derivatives. Options ...
  • Factors, risk premia. Analysis of individual factors/risk premia ...
  • Fixed income and structured finance. ...
  • International Investing. ...
  • Legal/regulatory/public policy. ...
  • Long-term/retirement investing. ...
  • Mutual funds/passive investing/indexing.
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  • Is there a benefit of having lower gap between 'in-sample' variance of portfolio daily returns and 'out-of-sample' variance of portfolio daily returns? (= better estimates the out-of-sample variance)
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  • I have developed a way of optimizing a portfolio, based on Global Minimum Variance portfolio optimization.
  • There are upside and downside of my portfolio optimization method.
cons : It cannot lower the `out-of-sample variance' of portfolio daily returns than the GMV portfolio. In other words, my portfolio optimization method fails to achieve better portfolio performance such as Sharpe ratio.
pros : However, my portfolio optimization method has lower gap between 'in-sample variance' and 'out-of-sample' variance than the GMV portfolio.
  • For illustration, let me give you an example. During training period to come up with how much weight to put on each stock, GMV portfolio optimization calculates the stock weight with variance 100 of daily returns. However, during the investment period (test period), it gives me 125 for 'out-of-sample' variance.
  • My portfolio method gives me 150 variance for 'in-sample variance' and 130 for 'out-of-sample' variance. As you can see, the actual variance is still low with the result of GMV portfolio optimization method. However, my method expects the 'out-of-sample' variance better than GMV method. GMV method is wrong by 25 percent, while my method is wrong by 13 percent.
  • As such, I am curious to know if my portfolio optimization method would be useful in any case of trading in stock market nowadays.
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I agree, you should test if the differences are statistical significant with a chi-squared test. I guess, probably they are not, according to my experience.
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The BCG matrix (named after the Boston Consulting Group that created it) is a portfolio management tool used by a company to help justify investments in products based on their market position. , their growth and the share that each of them represents in terms of turnover... !
The BCG matrix makes it possible to optimize the distribution of resources among the various SBA (Strategic Business Area) of a company.
So, How can the relative market share of the company be measured for a particular SBA?
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C K Gomathy Thx for your reply, but it's not easy to make a BCG Matrix ! that is why I am researching for, especially in digital marketing !
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How do you approach the selection and implementation of an information system for managing projects, programs and portfolios in an organization? What are the main criteria for choosing and implementing a management information system you can recommend?
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Krystsina Mazhei great question. The PMO often includes portfolio management responsibilities along with a team of project managers actually carrying out projects. It's more than establishing rules and guidelines for project management, the PMO should be delivering value.
Based on over 10 years of work with Fortune 500 companies, the biggest mistake PMO's make when selecting a portfolio management system (PPM) for their PMO is not accounting for their current state maturity. The failure rate of these tools is high, and while there are a few key reasons for failure, part of the problem is the lack of user adoption due to a complex tool.
According to research by Gartner, 80% of PMO's are only level 1 or level 2 maturity (out of a 1-5 scale on the capability maturity model). Unfortunately, most PMO's select software that is more sophisticated than what the PMO can actually use.
I have written more about these problems in an article here:
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Most Organizations manage pretty well the latter but have hard time to cope with the first. Breakthrough invention collapses paradigm, and challenges established wisdom that made the Entity successful. We cannot return in the past and fix what lead to the present culture. We can wait for the slow but more and more brutal death by obsolescence or irrelevancy. We can set up skunk works so should the path to be scouted leads to a dead end it doesn't compromise the entire Organization and portfolio management mitigates the risk. We can embrace the world and pray charismatic decision makers don't let their hubris doom all of us. But in fine, better lucky than smart. Open minded expertise, hard work and courageous decision making process help and make our chances.
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Extreme Breakthrough
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I have a keen interest in investment, so i want to research what factors play vital role in PMS rendering process.
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Performance of fund, timing ability of the fund manager etc.
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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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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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Anything related to this would assist me also.
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You first need to decide what you want to learn from your study. The methodology you choose will depend on the questions you would like to answer.
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By reading multiple research papers online. I realized the current portfolio optimization (industry standards) involves building factor models, perform (conditional) value at risk optimizations, (covariance matrix shrinkage) and even robust portfolio optimization and (even though very few people cited, the method to impute price histories when different instruments have different inception dates). But the information is really very scattered, I wonder if anyone could suggest some list of current state of the art portfolio management/ active portfolio managements(trading signals) methods that I could read into to understand more with the goal of being able to implement state of the art methods by myself.
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Dear Huang,
You are focusing too much on only Academica and Research Literature.
Financial Advisers (Int. big ones) have published annually surveys covering such "insight" questions.
Br
Mr
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What is the main objective of China behind funding heavily on One Belt One Road "OBOR" portfolio?
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India and Bhutan did not participate in this summit.
Without prejudice and my own observation or comments I will highlight what is reflected in the news track as under:
OBOR portfolio can lead to China acquiring equity and then controlling stakes in the projects, getting a permanent footprint in several small countries which is nearly impossible for it to achieve otherwise.
China always hides its military plans in its economic projects. A vast infrastructural footprint in dozens of countries in Asia and Africa will eventually mean a strong Chinese military presence across OBOR.
A small country that hosts infrastructure created by China and unable to repay the loan will be vulnerable to China's diplomatic and military moves
A key part of OBOR is China-Pakistan Economic Corridor passes through Gilgit-Baltistan region which lies in Pakistan-Occupied Kashmir. The Chinese presence in a disputed region which India claims as part of its own territory raises sovereignty concerns for India.
China is making inroads on its rivals too. Citigroup Inc. research shows Chinese investment into the five largest Southeast Asian nations — Singapore, Malaysia, Thailand, Indonesia and the Philippines — climbed to $13.5 billion last year, exceeding flows from Japan for the first time.
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I need to come up with a general literature of loan portfolio management and financial performance.
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1. The Concept of Corporate performance
2. The measurement of corporate performance (Discus all the measurements and there after discuss further on financial performance in 3)
3. Corporate Financial performance
4. Theories of corporate financial performance
5. Measurement of corporate financial performance
6. etc
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portfolio management best practices in quantitative indicators demonstrate the last condition of the best companies in the business market against risk factors and competitors.
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HI,
You may have a look to this recent paper:
Which Alpha?
By: Barillas, Francisco; Shanken, Jay. Review of Financial Studies. Apr2017, Vol. 30 Issue 4, p1316-1338. 23p. DOI: 10.1093/rfs/hhw101.
Sujets: Capital assets pricing model; Portfolio management (Investments); Asset management; Rate of return; Portfolio performance; Sharpe ratio; Portfolio Management; Other Activities Related to Real Estate; Assets (Accounting) -- Sales & prices
Best regards
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I have worked out a solution on computing the expected return from the market portfolio E(Rm) when the following information is not given:
Expected Market Return'
Beta of Individual assets
Variance of the market returns
Covariance of each security with the market.
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The Beta of a stock A can be estimated by the following formula :
Beta = cov(rA,rB)/var(rA)
where :
rA : the return of the stock A
rB : the return of the stock B 
Then you can use the Security Market Line equation to find the E(rm).
You can find more information on the attached link.
Best,
Iliasse 
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We came across different fundamental indicators of firm such as total assets, revenue or current assets of a firm. What is the best forecasting technique that can be used to forecast the future assets in a uni-variate analysis? 
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Dear Mr. Raza,
We use the regression model to forecast accounting measuring of a firm. And we use ROA, ROE, Tobin's Q as dependent variable.
If you want to get information about that, please write to me.
Greetings
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Dear colleagues, is there any information or papers about linking good corporate governance to portfolio selection? Thanks in advance for any help.
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Dear Elvis,
As you can see from the statement of Jyoti, the answer to your question may be not as clear cut as one could suppose. Jyoti points to La Porta et al. (2002) who argue that in the environment of better legal protection investors may be ready to pay a "security premium" on the stock prices. But, on the other hand, she says that costs of equity decrease due to reduced monitoring and auditing costs in a strong legal environment, a view that I also support. However, this contradicts the findings of La Porta et al. (2002). I think there are still lots of issues open to further research.
Paul
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My area of interest is the effect of interest regime switches on asset allocation.  While asset allocation may remain the same under interest rate volatility because of its cycle nature, it should be expected that in order to maximise returns, asset allocation changes with interest rate regime switches.  The gist of the research is whether fund managers are taking into account interest rate regime switches in portfolio management, and whether portfolios are optimal.  Failure to do so may lead to lower returns for retirees and may be a threat to security in retirement.  
I welcome reference to relevant research papers on the subject and any suggestions/comments
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Dear Karen,
I can't help much in the way of theoretical calculations, but I can show you a very interesting practical example of fund managers whose expectations on future interest rates are extremely contrarian (i.e., different than the mainstream). This directly affects their portfolio allocation decisions and recommendations.
Enter Bill Gross (the "Bond King") and Jeffrey Gundlach (the "King of Bonds"). Notice the similarilities in their nicknames.
Both of these gentlemen recently suggested to sell down almost every type of financial instrument in favor of "real" assets like gold and real estate. This is undoubtedly a function of their belief that the depressed interest rates environment created bubbles on most, if not all, of financial assets in the world.
Then I would dig into their letters and reports to investors, since they often elaborate more broadly in those documents.
Hope this helps.
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Hey,
I'm currently looking for a scenario tree modeling the return of some stocks or indices. As scenario tree generation is not the focus of my work, but I need some to test my portfolio model, it would be nice, if someone could send me his work. There is no need that the data is up-to-date. Ideally the tree has 3-5 stages and 3-5 stocks/indices.
Thank you very much!
Jelto
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I am working on it and I am almost done with it just wait for few months. Other scenarios are there in literature which can guide you for asset  return. You can  use bound and bound algorithm and can try yourself.
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Hey,
in the moment I'm dealing  with time consistency for optimization problems in the sense of Shapiro(2009). My problem in the moment is, that I think that a minimal expected return constraint for the final wealth normally leads to time inconsistent problems but I cannot find any papers about this topic. Carpentier et al. (2012) adresses this question in the Markovian setting, but I cannot find anything for the general one.
This leads to my final questions: Is there some literature adressing the question, how far minimal expected return constraints have effect on the "degree" of time inconsistency of the optimization problem? Are there similar formulations (for example for intertemporal return) that are mitigating this problem?
Thanks for your help.
Jelto
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Dear Jelto Borgmann
Greetings,
Please find the three attached files about the literature review about your question related for your topic may be useful for you and good luck
Best Regards,
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Hello guys,
my idea is to take a property index, for example the Austrian Residential Property Prices Data Index[1](the actual index can be found under [2]) and translate it into a risk number to stress the market price of a property portfolio.
I am not sure if measuring the volatility of the index at point t, is a good measure for, "how much market risk is in the current market state".
Any suggestion, what is the best way to do that? Any good paper suggestions?
I appreciate your replies!
  1. http://www.oenb.at/en/Monetary-Policy/real-estate-market-analysis/data-and-analyses.html
  2. http://www.oenb.at/dms/oenbEN/Monetary-Policy/Downloads/real-estate-market-analysis/Residential-property-prices-data/Residential%20property%20prices%20data-2015Q1.xlsx
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My approach would be to start with a simple risk measure.  You have quarterly observation in the various indices for which you have links and plenty of observations from which to calculate single period returns and then the standard deviation.  Issues such as leverage, default, are not particularly different from those faced in equity markets, although liquidity risk is obviously more of a problem at the individual asset level.  So holding and transaction costs are priced in or embedded in prices in the index and returns calculated from the index.
Take the total risk and explore it is useful for computing a Sharpe Index.  If you want the market risk then calculate beta using an OLS of real estate return with Market Returns.  This gives you Treynor index inputs.  Obviously heterogeneous assets have issues but when you are working with a portfolio these tend to disappear when you have enough observations.
It seems to me you have several indices to work with and this will provide the possibility of forming a portfolio of desired real estate risk by weighting the indices'' returns in a Markowitz portfolio.  You should have plenty of issues and results.
Enjoy
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Hello guys,
I have created a forecasting model, which comes up with future values for a rental index.
Further, I have transformed this volatile values into percentage risk, whereas 100% is the highest point in this values and 0% the lowest.
For example let`s take the time series:
    2010 100 -> risk: 0%
    2011 150 -> risk: 100%
    2012 125 -> risk: 50%
    2013 130 -> risk: ~68%
    2014 140 -> risk: 75%
I would like to use the risk values on a real estate portfolio, to simulate the outcome and visualize cyclicality for a portfolio manager. Has something like that being done?
Currently, I couln`t find any research doing what I would like to do? However, I was wondering if there exists some related field or research to this idea.
I kindly ask you for good papers / theses  of using "risk on property portfolios"?
Thx in advance for your replies!
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you may also read my another paper:
Zhuo Qiao, Wing-Keung Wong, 2015, Which is a better investment choice in the Hong Kong residential property market: a big or small property? Applied Economics 47(16), 1670-1685.
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Dear all members,
In stock market , forex and commodity market many brokers or some external firms give a sure shot suggestions for Trading to the Daily Traders with a monthly or annual charge. For example : they give 5 Intraday calls daily as Buy or sell particular share with Target of some price and stop loss of some price.
When looking after their performance the calls given by them are achieved to extent of atleast 80%. which is a good thing. But my doubt is how to they able to predict it with good success rate. Are they using Technical Analysis or they do fundamental analysis? If they use technical analysis what kind of analysis they incorporate?
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There is a tool in the area of security analysis and I am unable to recall it exactly, which suggests if a particular security is underpriced or overpriced. Underpricing/Overpricing would lead to buying/selling of these securities under the premise that markets corrects itself. Any security would not be too away from its intrinsic value for very long unless new information (shocks) is absorbed in the market which in turn reflects in the price of the stock of interest. 
It is a combination of both fundamental as well as technical analysis that is used to forecast the possible behaviour of a stock based on its historical pattern of movement and the fundamental figures. 
The reason for correct forecasting of these broking houses is that they are well connected and well informed with all the parties involved. Knowing every possible bit of information that might affect the price and the extent of that effect helps them suggest possible course of action. It is a mixture of diligent fundamental analysis, observant technical analysis, dormant market sense and a certain amount of courage. To an extent the herd mentality of the market participants also help. e.g. If a broking house announces that the shares of XYZ is a great buy as its pices are going to rise in foreseeable future. Lot of people would start buying it thus increasing the demand for that stock and hence pushing the price up and vice-versa.
Hope I made it somewhat clear
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I just have a Electre tri software.
I'm going to compare some sorting methods (around 5) in a stock portfolio problem. then I should find some proper sorting methods and softwares.
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Hi Seyed,
There are several software available. Find here some pointers. Best is to contact the authors if you are interested in their method.
- FlowSort  sorting method (based on Promethee methodology): www.smart-picker.com  --> there is a trial version and also research licences
- FINCLASS (Multicriteria Decision Support for Financial Classification Problems) (in Newsletter, Series 3, No. 3, Spring 2001): http://www.cs.put.poznan.pl/ewgmcda/pdf/SWFinclass.pdf
Other references:
Best wishes,
Philippe
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Working on a research topic, I am faced with this question " How can we propose a Product Portfolio Management framework for Engineer-to-Order industries?" Although, these industries have certain product families, they offer totally different products to their customers, based on what customers need. Sometimes they accept orders from customers, they design products and services just for them, but at the end they notice that the process was not as profitable as what they expected.
So, how can these industries define their product portfolio in a way in which they still have demands and the whole design, manufacturing and delivery process remains profitable for them?
Are there any related case-studies or articles in the literature? Thank you for your help and kind answers in advance.
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One novel way to manage the Product Portfolio for Engineer-to-Order industries is to apply "Knowledge capture ad Reuse" concepts while packaging solutions for product family.
The following case histories may provide you with more details on concepts and methods.
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The requirement of organizational strategy is to provide direction to increase stakeholders’ value at the same time reduce business risks. Strategic decisions today transcendent the boundaries of business, society and ecology. The question is regarding the strategic portfolio management in the complex and uncertain situation.
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In order to think clearly about any issue you need to state the problem using clear language. Business jargon, words like 'strategic' and ghastly meaningless terms like 'strategic driver' and 'stakeholder value', is designed to obscure the true meaning and prevent clear thought. Anyway, I think that if you translate your question into plain English (or Portuguese for that matter) you will see immediately that the answer has to be 'no': the idea that the way in which businesses choose which kinds of assets to acquire determines the extent to which they are good neighbours, good employers and good citizens (presumably that is the meaning of 'stakeholder' value, or did you mean to say shareholder value?) is absurd.
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We are writing an experience report on our empirical model to predict the effort and cost of application management transitions. We have not been able to locate existing models. This may be due to diffuse use of terminology in the field of application management.
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The transition I mean is when the software maintenance work on an application portfolio is handed over from the proprietor to a Service Provider or from one Service Provider to another. There are a lot of models available for the actual maintenance effort, but not very much for the transition project.
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Carhart´s 4-Factor-Model is often quoted in Carhart (1997). But as mentioned in this paper he worked out the model in his dissertation 1995. The title is: Survivor Bias and persistence in mutual fund performance. As it is not published, does anyone have this document or knows where to find it?
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Conditional survival probability can be estimated using a loglogistic survival model. The survivorship bias is more pronounced in the hedge fund's industry than in the mutual fund's industry. Conditional survival probability, conditioned upon a number of determinants, makes a better job at informing investors about the survival uncertainty than the "usual" survivorship bias or attrition rate. Many authors have studied the persistence of fund performance. I have published a couple of papers on both topics, with references therein.
BR
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Rolls shows, that conventional tests of the CAPM are tautological, as, due to its mathmatical properties, any security or portfolio satifies ex-post the CAPM-Equation resp. lies on the SML, as long as the benchmark-portfolio, which is used to calculate the securities or portfolios beta, is efficient.
(A short description and proof is found, for instance, here
However, this has very important implications for CAPM-based performance measures. The Jensen-Alpha, for instance, measures performance ex-post as the distance between the performance of a portfolio, that is predicted by its beta, and its actual performance.
Now, if ex-post any security or portfolio satifies the CAPM-Equation resp. lies on the SML, if the benchmark-portfolio used is efficient, how can the Jesen-Alpha significantly deviate from 0? If course, one reason my be that the benchmark-portfolio is not efficient. That, however, would question the validity of the Jensen-Measure, at all.
Has anyone an idea, how to solve this puzzle?
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Your puzzle is related to the joint-hypothesis problem inherent in asset-pricing tests. Roll (1977) has indeed demonstrated that any CAPM assessment is in fact a joint assessment of (1) the pricing model and (2) the quality of the market index used. If a deviation from the pricing model (i.e., if a non-zero alpha is found) this can be due to failure of the CAPM. However, this can also be due to the inefficiency of the market index used. In an earlier JFQA paper, Roll (1968) demonstrate that the errors in the market index used induce a bias in the abnormal return estimated. This puzzle is a logjam inherent in all asset-pricing tests. Similar puzzles have also been identified. For example, Shanken (1982) pointed out that the APT is not testable because the factor model can be arbitrarily manipulated by repackaging a given set of securities. Hansen and Richard (1987) have argued that conditional models are not testable because it is impossible to observe the full information set of investors. This is also similar to the joint hypothesis problem inherent in the tests of market efficiency (see Fama (1970)).
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Small and medium companies that sell to other small and medium companies have limited or no access to credit bureaus.
Those SME do have sometimes historical database of past transactions with its own customers.
Is there any credit algo/model out there, or previous study on calculating credit scoring, default, etc. based on past registered revenue (receivable) vs actual cash-flow information? Another question is related to building optimum portfolio based on receivables vs actual cash flow.
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Neither "receivable" nor "cash flow" alone is an effective tool for credit evaluation. Receivable is listed as a debit from prior credit sales in the journal entry. It is also treated in the Balance Sheet as current asset. As for the Cash Flow Statement, the first line of the cash flow statement is : Net Income. For this reason, a cash flow statement is treated as a secondary document. For credit evaluation, the following documents are more useful:
INCOME STATEMENT
When a credit sale is made, the sale is recorded as credit. When that credit sales receives payment in subsequent month, it is debit from the journal. By looking at the income statement, one can see the profit and loss of the operation. in addition, the income statement, unlike cash flow statement, gives detailed of sales and expense categories that give rise to the net amount (profit or loss). This is more useful than cash flow statement because the income statement---if taken in several operating period---the analyst can regress a pattern of each income and expense item, thus, able to predict future performance of the company. Since the cash flow statement uses the net income as a starting point, it cannot reveal the true picture of the company's operation or business model as the income statement would. For this reason, a cash flow statement is not an effective tool for credit evaluation.
In looking at the income statement, the credit assessor must separate cash sales from credit sales. Credit sales are recorded as part of revenue in the income statement then debit it as the accounts are paid later. In the balance sheet it is recorded as a current asset.
BALANCE SHEET
Receivable is recorded in the balance sheet as a current asset. As a tool for evaluating the company's operation receivables cannot be an effective tool because as a single item (account receivable) it does not give the whole picture, i.e. collection period, default ratio (unpaid receivable, etc). Therefore, the entire balance must be examined:
ASSET - DEBT = EQUITY
where ...
ASSET = Long-term Asset + Current Asset + Other Asset
We can see the weakness of looking at receivable as an indicator of credit worthiness of a company because receivable is a sub-element in the current asset category---which in tern is part of ASSET in the balance sheet. The entire balance sheet must be read as a whole document and read it with Income Statement.
Suppose that the company has large account receivable, this will reflect positively on the Owner's Equity---thus hiding the effect of its debt when in fact these account receivable may have problem in collection. For that reason, the balance sheet must be read together with the income statement. In the income statement, revenue collected from the account receivable can be isolated.
RATIO ANALYSIS
The good old fashion ratio analysis is an effective tool for credit evaluation. Given an income statement, balance sheet, and cash flow statement, one can construct ratio equation in excel sheet and calculate various ratios.
CREDIT MODEL
Credit evaluation model is generally developed in-house by each crediting agency. Fitch, for instance, has its own model which is different from that used by Moody. Banks also maintain their own credit scoring models. Generally, it is not released to the public, but some articles can be found as part of research articles released by each crediting agency. These article are readily available via google search engine.
OPTIMAL PORTFOLIO
For the reasons given above, receivable and cash flow statement should not be used as the sole basis for portfolio construction. The actual financial statements and ratio analysis should be used. One does not look only to company performance when constructing a portfolio; other factors must also be looked at: industry trend, national economy, regional development, etc. The investor's preference or institutional philosophy and practice also influence the formation of a portfolio.