Brain Teasers
 You have eight balls and a balance scale. One
of the balls is heavier than the other 7. What is
the lowest number of weighings on the scale
that you need to do in order to determine
which ball is heaviest?
Answer
 Two
 Weigh 3 against 3. Either you have a set of
3 that is heavier than the other, or you
know the heavier ball is in the remaining 2
 From the remaining 3 or 2, weigh 1 against
1. Then you will determine the heavier ball.
Announcements
 Upcoming Presentations:
 Technicals
 Alumni Mingle
 MIT Trading Competition
Market Update: The Macro View
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Quantitative Finance Society
Portfolio Strategies & Asset
Correlations
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Investment Objective – Why?
 Absolute Return
 Hedge Funds
 Relative Return
 Mutual Funds, Asset Management
 Retirement, Pensions, Insurance
 Asset-Liability Management
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Absolute Return Strategies
 Equity-Focused
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Value-investing
Event-driven, Merger/Risk Arbitrage
Long/short 130/30
Equity pairs trading 100/100 (market-neutral)
 Fixed Income
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Distressed debt/high yield
Convertible arbitrage
Pricing arbitrage
Value credit
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Absolute Return Strategies
 Global Macro
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FX, Government Rates
Sovereign Debt (Credit & Rates)
Emerging Markets Funds
Commodity Funds (Physical & Futures)
Index & ETF Relative-Value
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Absolute Return Strategies
 Quantitative
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Volatility, Derivative arbitrage
Algorithmic, High-Frequency trading
Statistical arbitrage
Technical analysis, momentum-based
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Relative Return Strategies
 Mutual Funds & Asset Management
 Most active managers underperform the
market
 Invest in S&P 500 or other index
 Passive management, cheaper fees and
lower transaction costs
 Asset allocation decisions are more
important than single-stock selection
 Risk-adjusted returns come from
diversification
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Relative Return Strategies
 Portfolio Theory
 Fixed Allocation (long-term historical)
 Long-term mean-variance optimization
 Efficient markets
 Adaptive Allocation (short-term historical)
 Markets change over time because of investor behavior
 Use trailing returns, correlations and volatility data instead
 Tactical Allocation (historical + forward-looking)
 Forecast the market and incorporate your view into the
allocation
 Market timing
 Black-Litterman model
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Asset Classes & Correlations
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Equity (Domestic, Int’l)
Fixed Income (Domestic, Int’l)
Cash, FX, Money-market funds
Commodities
 Metals, Agriculturals, Energy, Softs
 Real Estate
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Asset Classes & Correlations
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Asset-Liability Management
 Retirement & Pension Funds
 Need to pay out fixed pension benefits or
retirement benefits (annuities/perpetuities)
 Must invest in securities to match the
payments
 Insurance companies
 Receive fixed insurance payments forever,
in exchange for low-probability high-payout
 Reinsurance to spread risk
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Asset-Liability Management
 Fixed-income portfolio immunization
 Duration-hedging
 Convexity-hedging
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Questions?
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