Grand Canyon FIN451 full course latest 2015 december [all Week Discussion and all assignments ]

Your instructor will post at least one web link to an article that focuses on a specific financial event or issue. Using the link(s) provided and researching other related links to the topic, discuss the implications of the financial event being reported. How do you think this event relates to at least one of the issues presented in this topic?

Financial regulation in America

Fed up

Apr 25th 2015 | New York | From the print edition

“NO ONE is happy,” says Paul Volcker, a former chairman of the Federal Reserve, referring to the chaotic, overlapping and unaccountable sprawl of government agencies regulating America’s financial institutions. This week a group of wise men he assembled released a plan to reshape it. He would like to abolish one agency, merge some others and provide some checks on the growing power of the one he used to run.

Mr Volcker concedes that the odds are against him. Since the second world war, he says, more than 25 attempts to overhaul the regulatory shambles have failed. Politicians, alas, tend to respond to flaws by creating new bodies, without abolishing the old ones. The Dodd-Frank reforms adopted in 2010 in response to the financial crisis, for example, created a new consumer-protection agency and a new committee to monitoring financial stability.

Dodd-Frank also gave more power to the Fed, expanding its role in bank supervision in particular. The Fed has become more involved in markets too; efforts to revive the economy through asset purchases hugely expanded its balance-sheet. Complaints about its meddling are legion.

In a small country, Mr Volcker says, a central bank can take responsibility for monetary policy, the drafting of regulations and the supervision of financial institutions. But he does not think that will work in America. The Fed, he fears, will become too unwieldy and too powerful.

Instead, he would largely confine the Fed to monetary policy and the drafting of new financial regulations. Supervision would be the responsibility of a separate entity, although the vice-chairman of the Fed would head it. To streamline oversight of financial markets, the Securities and Exchange Commission and the Commodity Futures Trading Commission, which patrol different bits of them, would be merged—a suggestion that seems prescient in light of the claim this week that a futures trader precipitated a plunge in the stockmarket in 2010 (see article).

The Volcker plan would also reconfigure the Financial Stability Oversight Council (FSOC), the new committee created by Dodd-Frank. One of its main jobs is to decide which financial firms should be designated as systemically important, and thus subject to particularly heavy regulation. Mr Volcker would allow the treasury secretary to continue to chair the council, but would also strip him of a vote, in a bid to strengthen its independence. By the same token, the bit of the Treasury that currently provides advice to the FSOC, the Office of Financial Research, would become an independent agency. The intention is to provide an alternative voice to an all-powerful Fed.

There are several gaps in the Volcker plan. The fate of many entities of dubious value, such as the regional Fed banks, remains unclear. More importantly, Mr Volcker is focused on improving the effectiveness and accountability of regulators, and thus the soundness of the firms they regulate. But many in Washington, DC are more interested in expanding the government’s power over the financial world, thereby increasing its ability to steer money to politically desirable ends. When Mr Volcker said that no one was happy, he perhaps had not considered the politicians who set the system up.

From the print edition: Finance and economics"

Retrieved from http://www.economist.com/node/21649556/print

DQ 2

What do you think is the most important concept from this week's readings? How could you apply this concept to benefit you in your current or prospective profession?

week 2

DQ 1

Investment funds

Roaring ahead

Exchange-traded funds have overtaken hedge funds as an investment vehicle

Aug 1st 2015 | From the print edition

IT IS a victory for the humble—for the investment equivalent of a puttering hatchback over a gleaming Porsche. The exchange-traded-fund (ETF) industry is now bigger than the more established business of hedge funds. Assets in the global ETF industry were $2.971 trillion at the end of June, according to ETFGI, a research firm, $2 billion ahead of the hedgies’ $2.969 trillion, as calculated by Hedge Fund Research (see chart 1). In 1999 the ETF industry was less than a tenth the size of its ritzier rival.

ETFs are pooled funds, quoted on stockmarkets, that are designed to replicate the performance of an asset class. They usually do so by tracking a benchmark such as the S&P 500 (for American equities). Once the fund is set up, portfolio changes are mechanical, responding to changes in the underlying benchmark. Funds can track almost anything from the gold price to commercial property. Some have extremely low expenses: Vanguard’s S&P 500 index tracker charges only a twentieth of a percentage point a year.

Although hedge funds also invest across a wide range of assets, they take a quite different approach. Using far more complicated strategies, they aim to offer investors a superior service: either a higher return than achieved by the benchmark or a better balance of risk and reward. Because they can sell short (bet on falling prices), they claim to prosper in all kinds of market conditions. In return for this sophistication, they demand higher fees: an annual charge of 2% or so and a performance fee of 15-20%, making their founders very rich indeed. Hedge funds aim to attract “the best and the brightest” managers to their industry; ETFs merely aim to be average.

ETFs target the mass market: the humblest retail investors can participate and could in theory put all their savings in ETFs. The hedge-fund industry has a narrower clientele: it targets the wealthy and big institutions such as pension funds and university endowments. It aims to manage just a small proportion of their portfolios.

Both ETFs and hedge funds have been growing at the expense of a much larger rival—the conventional fund-management industry made up of mutual funds and specialist investors that pursue so-called “active” strategies in an attempt to beat the index. In the late 1990s, when Wall Street was surging thanks to the dotcom boom, conventional managers could generate impressive returns. Since 2000 there have been two bear markets in equities and bond yields have sunk to record lows; conventional managers have struggled.

In a world of reduced returns, the low costs of ETFs are more attractive. For the hedge-fund industry, in contrast, low returns are a problem. Most managers have to invest in the same equity and bond markets as everyone else. In the 1990s hedge funds enjoyed seven years of double-digit average returns. In the first decade of the 2000s, they managed three such years. In this decade, there has been just one.

Even when it comes to avoiding losses, the industry’s record has deteriorated. There were no years of negative returns in the 1990s, but three since 2000. Hedge funds’ reputation took a hit in 2008, when they lost a lot of money. On a rolling five-year basis, their returns have been disappointing (see chart 2).

The deteriorating performance is probably not a coincidence. Hedge funds sold themselves as clever and flexible enough to take advantage of opportunities that conventional fund managers neglected. But there may not be enough such opportunities for an industry with nearly $3 trillion of assets to exploit.

As a result, hedge funds market themselves rather differently from the way they used to. In the 1990s, the heyday of managers like George Soros, the industry sold itself on its ability to generate outsize returns. Nowadays it talks of the ability to generate “risk-adjusted returns”—steadier profits with less volatility. Where once they appealed largely to the rich, hedge funds now target institutions. A recent survey found that a majority of managers expect the bulk of their new money to come from pension funds over the next few years. Some pension funds use a “core-satellite model” in which the bulk of their money is in ETFs (and other low-cost funds that track indices) with the rest in specialist vehicles, including hedge funds and private equity.

Yet the steady return claimed by hedge funds can be replicated, or indeed beaten, with ETFs. S&P, an index provider, calculated the return over the past five years from a portfolio comprising 50% American bonds and 50% global equities. This portfolio easily outperformed the average return from hedge funds. S&P then deducted hedge-fund-style fees from the model portfolio; the result tracks hedge-fund returns very closely. It looks, in other words, as if hedge funds are a very expensive way of buying widely available assets. Last year CalPERS, California’s public-sector pension fund, announced it was selling off its investments in hedge funds, citing both complexity and costs.

ETFs have also faced criticism. Jack Bogle, the founder of Vanguard, an index-tracking firm, has argued that the ease of dealing in the funds may cause retail investors to trade too much, switching in and out of asset classes in a vain attempt to time the markets. A more widespread concern relates to liquidity. All ETFs allow investors to redeem their holdings instantly, but some of the assets they own, such as corporate bonds, trade infrequently. They thus face a potential problem if prices fall sharply and a lot of investors want to sell at once. That might force them to delay or limit redemptions (imposing “gates”, in the jargon). Some see this as the trigger for the next market crisis.

The industry’s defenders argue that the sector got through the 2008 downturn without a problem. Alan Miller, who used to run a hedge fund but now manages assets for individuals at SCM Direct, which specialises in ETFs, points out that “ETFs have been tested in a lot of market environments and not a single one has failed.”

Short of a calamitous collapse at an individual fund, the ETF industry is likely to keep on growing. Ten years from now, it may be double or treble the size of the hedge-fund sector. The race is not always to the cheap, but that’s the way to bet.

From the print edition: Finance and economics

What do you think is the most important concept from this week's readings? How could you apply this concept to benefit you in your current or prospective profession?

week 3

DQ 1

Buttonwood

Practice makes imperfect

Even experienced fund managers don’t beat the market

Aug 9th 2014 | From the print edition

“THE harder I practise, the luckier I get,” said Gary Player, one of history’s greatest golfers. And it is a widespread belief that experienced professionals are a lot better than neophytes. But is that true of fund managers? A new study suggests that the answer is distinctly mixed.

The paper examined the records of 2,846 American mutual funds between the start of 1996 and the end of 2008, overseen by 1,825 managers (some looked after more than one fund). Turnover was high; fewer than a quarter of the managers lasted more than five years. Just 195 of them lasted a decade.

Unsurprisingly, those managers who were poor performers in their early years were more likely to lose their jobs. In their last year in charge of their funds, these neophytes underperformed the veterans. However, the veterans did not outperform consistently; what they did do was avoid periods where they did particularly badly. The authors concluded that “even long-term managers show no ability to beat the market on a risk-adjusted basis. The key to a long career in the mutual-fund industry seems to be related more to avoiding underperformance than to achieving superior performance.”

Another conclusion may be that it pays to start well. A few years of outperformance at the beginning of your career will establish a reputation as a star manager, and the money will roll in. At that point, it may not matter what happens next in terms of returns. A previous study by the same academics found that successful performance in the first five years of a manager’s career is not predictive of success in the following five years.

A similar conclusion was reached in a study backed by Vanguard, a manager best known for its “tracker” funds—which aim simply to replicate the market’s performance rather than beat it, as “active” funds attempt to do. It analysed the performance of equity mutual funds that had been in the top quintile (20%) of their sector, and thus might be favoured by investors. In the following five years, their performance deteriorated, with more of such managers ending up in the bottom quintile than in the top (see chart).

Why is it so difficult to be a consistent outperformer? In another paper, Charles Ellis, an investment consultant for more than 40 years, explains the reasons. Fifty years ago, institutions did less than 10% of all trading on the New York Stock Exchange; now it is more than 95%. In general, fund managers have access to the same information as their peers and, for liquidity reasons, tend to focus on the largest stocks in the market; this makes it very difficult to perform better than the benchmark, particularly after costs and fees are deducted. A few genuinely brilliant managers may outperform the index but it is all but impossible to identify them in advance.

Academics have been alive to this issue for 40 years; what is surprising, however, is how slow the active funds’ clients have been to catch on. Tracker funds still have only around 11% of global fund-management assets, according to a report by PwC, a consulting firm. The simplest explanation seems to be blind optimism. Mr Ellis cites a survey that shows clients expect the average manager to beat the market by a percentage point a year, after fees. Pension funds run by trade unions, bizarrely, are the most optimistic of all.

There are a number of potential explanations. Some are psychological; the “Lake Wobegon effect”, in which everyone thinks they can pick above-average managers; or what might be called the “don’t just sit there, do something” problem, in which trustees have to justify their existence by shuffling managers, rather than just buying a tracker and going to sleep.

Another possibility is that investors have to be blindly optimistic if they are to justify the high returns assumptions they have made. Public pension funds in America routinely assume returns of 7.5-8% a year even though the risk-free rate is less than 3%. If they are not going to earn these returns by tracking the index, they must assume they can beat the benchmark. As Mr Ellis tartly remarks, “among pension-fund executives, the elusive magic of outperformance is now the most favoured way of closing funding gaps.”

The best, it seems, is the enemy of the good. In the hope of earning outstanding returns, investors are paying active fund-management fees that will only dilute the modest returns they are likely to earn.

Economist.com/blogs/buttonwood

From the print edition: Finance and economics"

References

http://www.economist.com/node/21611090/print

week 4

week 5

DQ 1

Your instructor will post at least one web link to an article that focuses on a specific financial event or issue. Using the link(s) provided and researching other related links to the topic, discuss the implications of the financial event being reported. How do you think this event relates to at least one of the issues presented in this topic?

5 postsRe:Topic 5 DQ 1

http://www.economist.com/blogs/schumpeter/2013/12/behavioural-finance

DQ

What do you think is the most important concept from this week's readings? How could you apply this concept to benefit you in your current or prospective profession?

week 6

DQ 1

As I am not sure you will be able to recover this article from "Euromoney", I am posting the entire aticle in this post:

"

Abstract (summary)

Equity options come in a number of different forms. The 2 most common are options on individual stocks and options on stock indexes or sub-indexes. In addition, equity options on both stocks, stock baskets, and indexes can be securitzed and listed on, for example, a stock exchange. In this form, they are known as warrants. The price of an option, the premium, consists of 2 values, intrinsic value and time value. Often, the market value of an option exceeds the intrinsic value. This difference is the time value, and it is determined by a number of factors, including: 1. stock price, 2. time to expiry, 3. interest rates, 4. dividends, 5. volatility, and 6. option type. Options can be used to enhance the returns from equity portfolios, reduce the risks in these portfolios, lock in target rates of return, and provide catastrophe insurance. Like futures contracts, they can be used for rapid asset allocation with minimum transaction costs.

Full Text

Options on equities have been traded for many years. However, prior to the opening of the Chicago Board Options Exchange in 1973, such trading was done on an over-the-counter (OTC) basis. There is still a thriving OTC market in a wide variety of equity options, but the majority of trading is done in standardised contracts on recognised exchanges.

Equity options come in a number of different forms. The two most common are options on individual stocks (the earliest form of equity option) and options on stock indices or sub-indices. In addition, equity options on both stocks, stock baskets and indices can be securitised and listed on, for example, a stock exchange. In this form, the options are known as warrants.

These contracts have proved immensely popular--so popular that the value of options trading often exceeds the cash value of trading in the underlying asset. New contracts continue to be developed and launched, and new structures are constantly being tested. There are capped options, low exercise price options and options on baskets. Almost every derivatives exchange that lists a financial options contract trades equity options.

The proliferation of new derivatives exchanges will ensure that this growth continues. Often the first contracts to be listed on these new exchanges, for example OTOB in Austria, are equity options.

PRODUCT ANALYSIS

An option is the right but not the obligation to buy or sell a specific quantity of a particular asset at a specified price at or before a specific date in the future. In the case of an option on a single stock, the buyer of a call option on that stock has the right to buy the stock at the strike price of the option. If he does exercise that right, then the seller of the option has to deliver the stock in exchange for cash to the value of the strike.

In the case of a stock index option, this is not possible as delivery of the index is impractical. Stock index options therefore are either cash settled, or are options on a stock index future--so-called futures options.

There are two types of futures option. The first, on exercise, delivers a futures contract at a fixed futures price. For example, suppose that the June futures contract on the S&P 500 is priced at 270. An investor buys a call option on this contract with a strike price of 255, conferring the right to buy the contract at 255. In May, the futures price has risen to 275 and the option holder exercises the option. He pays 255 and receives a long futures position against which a margin has been paid at the market level. This futures position is then immediately marked to market. To lock in his profit the buyer of the call must close out his position by selling the requisite number of futures contracts in the market at 275 and re-claiming any margin he has had to deposit against the futures position.

The second type of futures-option is cash-settled. In this case, when the option is exercised the option holder does not receive a futures position, but the difference in price between the futures on the exercise date and the strike price of the option.

Because the price of the future does not move in perfect step with the price of the underlying, and because of the margin requirements, options on futures will differ in price from cash-settled options on the same underlying asset. However. the basic principles of pricing and usage are the same for all equity options.

PRICING

DQ 2

What do you think is the most important concept from this week's readings? How could you apply this concept to benefit you in your current or prospective profession?

week 7

DQ 1

Your instructor will post at least one web link to an article that focuses on a specific financial event or issue. Using the link(s) provided and researching other related links to the topic, discuss the implications of the financial event being reported. How do you think this event relates to at least one of the issues presented in this topic?

http://www.forbes.com/sites/investor/2012/04/26/a-better-way-to-analyze-portfolio-manager-performance/

PT

DQ 2

What do you think is the most important concept from this week's readings? How could you apply this concept to benefit you in your current or prospective profession?

week 8

DQ 1

http://www.forbes.com/sites/katinastefanova/2014/10/20/why-taxes-and-trading-costs-kill-investment-returns/

PT

DQ 2

What do you think is the most important concept from this week's readings? How could you apply this concept to benefit you in your current or prospective profession?