This implies that we don’t need the entire universe (or a large set) of investors to correct mispriced assets. We only need one investor to identify the arbitrage window, and that investor alone, by taking an infinite position, should bring enough pressure to restore equilibrium.
What type of asset-liability matching am I talking about Asset-liability matching means different things to different people, even when you think you’re dealing with a specific situation and therefore talking about the same thing. Painting with broad strokes, there’s asset-liability matching (ALM) when managing a pension fund, an insurance business, or a corporation’s balance sheet. …
For money managers (and for our personal investments), rate of return is the most important number that is expressed in percentage terms. But how do we calculate it? Do we use the simple and intuitive total rate of return formula? Not so fast… A distinction without a difference In the absence of intraperiod external cash flows, …
Realized return of buybacks When we think about returns on buyback programs, we normally look back and estimate the realized return of holding the company’s stock. For example, company X has the following characteristics: Stock price (beginning of period) → Pb=$100 Stock price (end of period) → Pe=$150 Dividends → D=$10 Buybacks: 1 share repurchased …
Swaps is one of those topics that is perceived to be basic, easy, and intuitive. But not really. We study them briefly in business school and in the CFA curriculum, but that happens in a vacuum. We cannot see the thing*. Later on in life, we find ourselves in meetings with financial advisors discussing swaps. …
Over the years, I’ve asked this question to my banker friends: “what’s our minimum cash balance?” The topic would come up from time to time, but not very often because in the high margin industries of biopharma and high tech, there’s always been ample cash lying around. Unsatisfactory answers The responses I received were typically …
When equity brokers pitch their share repurchase capabilities to corporations, they never fail to mention their ability to outperform VWAP. When asked how they outperform so consistently, the answers tend to be non-answers: “we have proprietary algorithms” “our traders are top notch” “we can see the flow”. They forget to mention that in many cases …
Many times we use the terms return and yield interchangeably, and that may be because both concepts describe investment performance. But they are not the same. The difference is this simple: return is backward-looking, yield is forward-looking. Return Return is a measure of earnings and gains/losses achieved on an investment over a time period in …
Most corporate investors use benchmarks to express their desired asset allocation, to guide their asset managers’ portfolio construction process and, on an ex-post basis, to measure their performance. Well known indices such as the S&P 500 or the Barclays U.S. Aggregate are generally used as benchmarks. In BS (balance sheet) fixed income investing, the most …
I’m going to give you a rule of thumb for estimating portfolio yield after rebalancing (a.k.a., liquidating) your bond investment portfolio. If you don’t already explicitly know this rule of thumb, I am pretty certain that you have developed the intuition for it. However, here is the value add: teach this rule to your boss, …