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Ses 15: Portfolio Theory III & The CAPM and APT I
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- เผยแพร่เมื่อ 18 ส.ค. 2024
- MIT 15.401 Finance Theory I, Fall 2008
View the complete course: ocw.mit.edu/15-...
Instructor: Andrew Lo
License: Creative Commons BY-NC-SA
More information at ocw.mit.edu/terms
More courses at ocw.mit.edu
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god bless this guy!!!! my finance professor is so bad, I cannot understand anything in class. here everything seems very simple
I agree! I love the visualizations he creates for his students.
where are you working by now?:D
This man is amazing.. very knowledgeable & good at explaining. Well done MIT
The exchange between lecturer and students is amazing.
Thanks to MIT for sharing and thanks to Prof Lo for explaining this well!
Bm
Y5y
@@LondonTablefootball mobile
Never explained anywhere else SO clearly! Brilliant.
For some reason this is easier to follow than an undergrad class in financial economics...
Instructor quality.
agree
I was watching this video again on my alternative account a few minutes ago and just saw this comment again. The first words in my head were instructor quality which is what I wrote a year ago. I've completed more classes in finance now and this guy taught me more in like ~20 hours of watch time than what I learned, so far in all of my undergrad. I am not exaggerating either and it should say that because I am coming back to these on my spring break in 2021 to watch these again.
@@gregorybattis9588 i completely agree, this course has been very useful to me and im spending my spring break watching these! do you know if this course was taught to undergrads at MIT or was it a graduate level course?
@@offwallstreet6386 Graduate level class for MBA students.
I taught software engineering at the university level for 5 years. This is an able communicator. Very good, peaceful, and engaging attitude.
This would be a very popular professor where I went to undergrad and grad school (UC Berkeley). I bet his lecture materials are organized and accurate. All my peers at Cal would try to get into his courses.
It's a blessing that MIT knows how to choose which profs to make available to the public. Thank you MIT!
.
Wow this is fantastic, my university finance professors suck! So happy this is a free resource online for anyone who wishes to learn
this is one of the best processor on MITOpencourse. Respect.
He is not wasting time writing things down on a board. If I watch the other MIT-courses on TH-cam with other teachers I get the unpleasant feeling the quality of teaching can have a huge impact on succeeding to get your diploma.
Increadible class, very easy language!
The explanation for the Nobel Prize model economic simplification is the best part 1:02:00!!!
Netflix is a stock that’s negatively correlated with a market downturn. Now I just need a time machine to go back 8 years so I can get a kudos from the professor!
You also need a time machine to take advantage of it, seeing as that covariance only describes a past movement and there is little reason why it would predict future covariance. That is why the theory presented in this lecture does not translate to reality very well. Perhaps the more dynamic model he mentions does, but I doubt it. Sadly it is a fundamental problem with using statistics for stock analysis.
55:38 "Because Warren Buffett beat it (market) in the past, do you think he's going to beat it in the future?". This actually does make some sense, all those portfolio analysis were based on historical data. So portfolio analysis is basically saying "market was behaving this way in the past, so we assume it is going to behave like this in the future." Whis is a big assumption, and I admit this assumption seems more solid - comparing trust historical market data than trust Buffett's historical performance. But I am yet convinced this is a much better practice.
Yes, at its core it is not coherent to question whether Buffet's future performance will be similar to his past performance while at the same time building a whole theory on stock returns being static and unchanging. In fact, baked into their assumption is that Berkshire Hathaway will perform similarly in the future to the past.The market quite obviously does not behave the way this model is suggesting, so it is very difficult to see its use and limitations clearly.
1:05:22 capm
You read my mind
HoneyMayoHair i
This is pure ALTRUISM. Thank you
bless
what a wonderful explanation. so clear
i ain't switiching side but i just love this professor.
There is a typo on Slide 37 at 4:18. wIBM should be wIBM-squared.
I noticed as well. Yes it should be squared
Thank you professor a great lecturer
57:00 ab, professor seemed to like high fee active managing mutual fund over zero fee warren buffet… also, acc. to SPIVA 90% mutual funds underperform 0.03% fee sp500 index etf .. so.. prof. Lo wrong?
Totally agree a room full of people laughing at warren buffet. Thank god time has proved them all wrong 🙏. In the short team the market and life is a voting machine over long term its a weighing machine.
Well, mutual fonds don't hold the market portfolio, they try to deviate from it. So they are not on that tangent line. So in a sense, this model captures why mutual funds fail. It was theory like this that gave us market cap weighted index funds to begin with, as the professor mentioned.
I think this isthe second time the professor refers to the next class 15.403. Can't this be also released on this channel?
Amazing lectures, indeed
Professor is exceptionally good.
41:50 The indifference curve is in the third dimension.
It is all possible portfolios you can construct whose tangent-line-frontier point is same.
I wish I could go to this university
Me, too.
@@luisfco.martymatos5431 me three
@@nerd1900 gzz
How do you draw a portfolio with 3 stocks on a curve? The weighting vector has a dimension of 3, [w1, w2, w3], even w3=1-w1-w2, you still need w1 and w2, it will be a portfolio surface instead of curve
Brilliant !
If you conceptualize a company as an aggregation of different business lines, where each business line has its own rate of return, then each business, like IBM, GM, and Motorola, is already a portfolio of other businesses. Consequently, the idea that you never want all your money in one company is a slippery concept. Assembling companies into one bottom line results in either a portfolio, or a mutual fund, or a diversified corporation itself. What distinguishes each of these baskets of assets is how much control you have in shifting the proportion of each constituent asset. If it's your portfolio, you can change it each day. If it's a mutual fund, the fund managers decide how much of each company to own. If it's the company itself, the directors decide which lines of business will be expanded or sold off. The market force that's always at work is risk==return. Hence, if you believe that diversification is desirable, just know that the lower risk comes with a lower expected return. Markets will always return to efficiency. But in the near term, you can achieve economic profits from market inefficiencies.
Is there any reason that this portfolio theory is restricted to public equity and T-bills? There are many classes of assets beyond these two. For example, corporate bonds, gold, private equity etc. How do these figure into this theory?
It's not restricted. For example you can consider gold as a risk-free asset and corporate bonds as a risky asset etc. You just need the data. However, T-bills are considered "the most risk-free asset" and that is the reason they are being used so frequently.
Good lecture - although I would have preferred if he explored an example of the calculation of the tangency portfolio given a risk-free rate.
+iSk00L Yes he should have shown up a calculation for the tangency portfolio. But let me help you. In this model everyone (every market participant) invests either in the tangency portfolio or in T-Bills (risk free asset)...or in a combination of those two. So if everyone invests in the tangency portfolio how can the market be in equilibrium? For example: Can the equilibrium be 50% of the porftolio is IBM and 50% is Motorola? No, because if everyone only invests in those two stocks the price of GM would be zero. Why would someone not buy a stock for zero dollars if one would have the opportunity to generate dividends from that stock. So the market participants would also buy Motorola. The price wouldnt be zero. And that procedure would be repeatet until every stock has a fair value. And the outcome is, that everyone would have the stock in exactly the same ratio as its market capitalization....So every portfolio includes k*IBM, k*Motorola, k*GM....To sum it up: Tangency-Portfolio = every asset on the market 1*.....And that is exactly what ETFs try to make a replica of.
Philipp Mayer thanks, but I know already and passed the exam. But thanks anyway
awesome lecturer. fantastic .
15:33 Capital Market Line
why do they have names on their desk
I’m a bone head… I’ve been long $TMV (inverse 20 yr bond) and I’m up +40% in 4 weeks. Crazy cycle!
Fantastic!
I'm confused, at 30:46 when the prof. was answering the question regarding adding an extra stock to reduce the overall st.d. of the port.
He said that as long as the correlation of the new stock is anything
I just used chatgpt to calculate an example case where I add a new stock with very positive correlations to the existing one, turns out my overall st.d actually increased which is not what the prof. said.
Example case:
Existing Portfolio: Contains stocks A and B with a correlation of 0.4.
Adding Stock C: Stock C has high correlations with both A and B, say 0.8 and 0.9, respectively.
In this case, adding Stock C could lead to an increase in the portfolio's standard deviation due to the high correlations. The increased exposure to correlated risk factors may outweigh the diversification benefits.
Next Warren Buffet = Mark Cuban = Michael Sailor = Jay Clayton
Is it actually possible to have zero weight in a particular stock in market portfolio?
Because a zero weight implies that nobody wants it which will actually lead to decrease in price and hence an increase in its expected return. Any insights on this ?
If a stock price is going to zero or a very low price there's a propably a good fundamental reason for that. Only if it's undervalued you might expect a positive return within the next 10 years.
@4:25- Shouldn't the weight for IBM be wIBM^2, like Motorola and GM's weights?
correct
What’s a bonbon?
Are their online visualization tools for us to play with the portfolio theory? I really want to put in a few stocks and see my risk-reward tradeoff options.
Love it!
1:01:20 and continue--
'held in proportion to their market value'... I didn't get it..does this mean their weight proportions compared to entire market capitalisation??
Superb
I’ll never go to grad school if I knew better, fun and much economic class like this…lol
how to create the parabola or the curve?
In the example of 3 stocks the return of Motorola is the highest. So if you combine the other two stocks with Motorola how can there be return higher than that of Motorola. Because return on a Portfolio is simply the weighted avg. of each portfolio. So how is it that the 'efficient frontier' (3 stocks) if passes ABOVE motorola ? Even if you borrow to buy Motorola still the efficient frontier should pass through Motorola.
Because of the correlation/covariance between the stocks within this 3-stock portfolio. Due to how portfolio returns and portfolio variance are calculated, a portfolio return can be higher than any individual stock within while the portfolio variance is lower than some of the of the stocks' variances. More specifically this is due to the correlation between stocks within portfolios and the fact that low correlations result in low variances. Portfolio returns don't take into account the correlations between the stocks, so while the variance is decreased from the correlations, the returns are not.
You are absolutly correct. That graph is incorrect. it does not matter if short sales are allowed, the efficient frontier must pass by Motorola.
@@JJGS_ he mentioned it in the previous lecture. The more assets in the portfolio the more cross varience terms in the equation. The coefients of these are the level of correlation so the more you add the more non perfectly correlated stocks, which shifts the curve to the left.
enjoyed the class lesson
So the government can control market demand by controlling the price of T bills.
LSE student watching this instead of FM300
Reading student using this for revision ;)
5 year old preparing for the harsh job market
is this class have recitation ?
There are written recitations, see ocw.mit.edu/courses/sloan-school-of-management/15-401-finance-theory-i-fall-2008/recitations. Best wishes on your studies!
@@mitocw thanks you so mucn
I've been wondering whether the idea of diminishing marginal returns applies to people with addictions (Frank Gallagher) and ocd and if it applies to money. Can one ever get less satisfaction from accumulating more and more money (Warren Buffet, Bill Gates) or does it only apply to goods money can buy?
If you have 0 dollars and i give you 100 dollars, how happy would you be? Now if you have 100.000 dollars and i give you 100 dollars, how much would that increase your satisfaction?
mo money mo problems
it's good, thanks teacher
55:44 10 years later and Prof just got burned on shorting Warren Buffet
Frr ! 😂this is the comment I’m looking for !
세무회계도 미국세법 참고한거라 번역의 문제
Past return and expected return are not equivalent. Doesn't make sense that IBM, or any of the other companies have a future expected return that is equivalent to their past. New CEOs, new marketplace, new market players, new competitors, new technology. Mean variance optimization works fantastic in hindsight, but does not have any predictive power.
yea i think every teach should present their return on investment before every lecture.
The problem with that is that past success is not a predictor of future success. IE if someone happens to be on the right side of a normal distribution by picking a single stock that lies within an index, it does not tell us anything about whether that was luck or skill, or whether the results are repeatable.
and yet they use past for almost everything in investments / modeling.
they even use it's for job hiring and job promotion.
but more over i would not judge anyone by a one of stock but many over many years. I don't think it's too much for some to practice what they preach and show the success that comes. If the guy teaching it cannot make it work then why would I be able to...
We have to use the past for data, but we should do so understanding the importance of statistical significance, the scientific method, and peer-review. As well as a strong understanding of the principles of mathematics (correlations, etc.) before misusing them.
Yes i get that and that's great.
But only useful if you make money from it
If the teacher is a poor investor i want to know
is that too much to ask?
Informative
this is helpful
so i guess amazon and all those technological stocks are negatively correlated to the markets? in these days
Cryptocurrency negative correlation with positive return new asset class
Very good
સ
Nice!!
1:05:06
great
외국어는 한글로 번역해야 함축된 의미를 되뇌어서 내 지식으로 변환가능 그래프 그리는게 시간낭비 너만의 부교재 워크북 재무관리는 번역의 문제때문에 어려운것이지 재무회계하고는 다르다
The comment is for the "Bullet" frontier
I tried to apply those formulas to Bitcoin, got totally rekt!
take it easy gym teachers
37:45 Alpha
We're hedge fund managers, boys.
God 3:33
Sadly, CAPM doesn't actually work.
au contraire, they still find it applicable in certain industries
actually CAPM does work, which is the basis of how ETF works.
Yeah sadly. In general, any finance theory that relies on std deviation as measure of risk is doomed to fail. VAR, CAPM, Sharpe ratio, Beta etc all failed.
Those who cant do teach
Those who cant teach teach gym
"those who can't teach teach gym" HEUHEUEHUE brbr
Why don't they shut up with
all of those questions and
let Prof. Lee talk!
lol class participation is a % of the grade so they have to
A fifteen minutes lecture painfully prolonged to 1 1/4 hr. Yet the students struggles to comprehend.
And yet you struggled with basic english grammar🤦♂️