Estimation of betas with regression is adequate for asset managers, but it is not appropriate in risk management of portfolios because monitoring is done on a frequent basis – daily and even intra-daily. Indeed, parameters estimated by OLS at these frequencies will not reflect the actual market conditions because they just represent an average value over time on the sample.
The two fundamental ingredients of Markowitz (1952) mean-variance optimization are the expected (excess) return for each asset (the portfolio manager’s ability to forecast), and the covariance matrix of asset returns (the risk control).
Estimating and forecasting beta of each stock that is a potential candidate for inclusion in a portfolio is a prerequisite to apply the single-index model. Analysts could be asked to provide subjective estimates of beta for a security or a portfolio. Conversely, estimates of future beta could be arrived at by estimating beta from past data and using this historical beta as an estimate of the future beta.
The single-index factor model assumes that the co-movement between stocks is due to a single common influence or index. Casual observation of stock prices reveals that when the market goes up (as measured by any of the widely available stock market indexes), most stocks tend to increase in price, and when the market goes down, most stocks tend to decrease in price.
Factor models are applied by portfolio managers to analyze the potential returns on a portfolio of risky assets, to choose the optimal allocation of their funds to different assets and to measure portfolio risk. The theory of linear regression-based factor models applies to most portfolios of risky assets, excluding options portfolios but including alternative investments such as real estate, hedge funds, and volatility, as well as traditional assets such as commodities, stocks, and bonds.
The expected return of a financial asset can be modeled as a function of various theoretical factors according to three main categories: macroeconomic, statistical, and fundamental. Employing multiple factors addresses their cyclicality and increases diversification. However, there is no free lunch attached to factor investing.
The asset selection decision can be an active one, where the investor attempts to buy undervalued assets in each asset class (or sell overvalued ones) or a passive one, where the investor invests across assets in an asset class, without attempting to make judgments on under or over valuation
Capital allocation methods are used to estimate risk margins in the form of return on equity (ROE) measurements and targets from a top-down perspective. Actuarial risk theory views risk from a bottom-up perspective because it aims at modeling solvency. At a macro level, financial theory views capital as the equity capital supplied by investors.
Innovation in Distribution and Retail of the Publishing Industry in Italy should focus on the integration of old and new channels to target correctly customer needs and allow sales to grow again.
