History of Finance - Review

Based on Statistics, we can't be always at the top. Whatever we do, we influence the market. So we can't all be winners.

• Pre-Markowitz - make money if your an insider.
• Gerald Loeb 
• the battle for investment survival
• put all your eggs into one basket
• John Maynard Keynes
• Psychological Principle
• The Greater Fool theory
• Beauty Contest Analogue 
•  based on perception, we ask the question: what will the judges judge?
• what do you think the others will think?
• even if I bought at a high price, some other fool will buy at a higher price
• Markowtiz 
• Issue before: How to measure returns
• he introduced risk and how to put up a portfolio and maximize returns
• significant is within the utility curve
• Markowitz Paradox - utility curves 
• Asset universe
• Markowitz -diversification as the risk averse technique
• James Tobins
• optimum portfolio
• don't put your eggs into one basket
• reduce risk using the combination of the risk free rate and others
• we can go outside the Markowitz area
• Simplifying calculus - efficient frontiers labours on calculus
• William Sharpe
• Main feature is the stock market itself
• risk that can be diversified away
• CAPM - Eugene Fama uses the term "one factor model" to describe Sharpe's
• Efficient Market
• Prices fluctuate ramdomly
• Eugene Fama - EMH, 1970
• 1974
• Paul Samuelson
• calls for a benchmark
• if can't beat them, join them
• "Market Portfolio"
• Charles Elis
• Mimic the market - as a proxy for the market
• the use of "index funds"
• it manages the portfolio and costs
• it means no more of the excess returns

Trying to figure out: How to deal with your investments by exerting Alpha.

Alpha - need not to look for weights

• Beta - horizontal
• Alpha - y - intercepts ( excess returns)
• To what degree is the market beatable? Can the market be beaten

Hunt for a better mouse trap

• Multi-factor model 
• Macro-economic Factor Model
• GDP+Analysis => asset allocation
• Industry => asset allocation
• Search for Arbitrage opportunities (buy and sell) and convergence trade (put and call options)
• Search for market anomalies (e.g January effect, small cap effect, low P/B ratios)
• Value vs growth Stocks, underlying stocks Not the company itself
• Contrary strategies
• Risk minimizing modeling (VAR)

References: Searching for Alpha by Ben Warwick

Films: Inside Job, Margin Call, Wall Street Never Sleeps, Wall Street, Too Big to Fail