Active Beta Indexes: Capturing Systematic Sources of Active Equity Returns

Active Beta Indexes: Capturing Systematic Sources of Active Equity Returns
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Active Beta Indexes:

Capturing Systematic Sources of Active Equity Returns

BY Khalid Ghayur, Ronan G. Heaney, Stephen A. Komon, Stephen C. Platt, Andrew W. Lo (Foreword by)


215 pages March 2010


An informative guide offering new and innovative ways to think about active management and investing ActiveBeta Indexes presents exciting new research that shows how above-market returns can be achieved in a low-cost, transparent, and efficient fashion. Active Betas reflect fundamental investment principles that have long been the foundation of active equity returns, but are commonly masqueraded as investment skill, or alpha. This groundbreaking book lifts the veil to uncover the common sources of active returns and reveals their beta-like properties.

Developed by leading investment practitioners at Westpeak Global Advisors, ActiveBeta Indexes introduces Active Beta sources and explains how the behavior of short- and long-term earnings growth gives rise to systematic sources of active equity returns.

Details a new index framework and research findings that could change the face of active portfolio management

Presents patent-pending innovations for constructing style indexes and informationally-efficient active portfolios

Explores the historical performance of ActiveBeta Indexes

Wealth advisers, consultants, pensions and endowments, and other institutional investors will find the intellectual honesty of ActiveBeta Indexes a refreshing perspective on the active management industry. They will also find it a useful guide to a more strategic allocation of their risk and management fee budgets ¨C a growing necessity in these challenging times.


Foreword (Andrew W. Lo). Preface.

SECTION ONE Background.

Chapter 1 The Evolution of Market Indexes.

The Early Days of Indexing.

The Inception of the Mutual Fund Industry.

Enter Academia.

The Advent of Index/Passive Mutual Funds.

Index Mutual Funds for the Public.


Chapter 2 The Evolution of Equity Style Indexes.

Empirical Challenges to Financial Theories.

Theoretical Explanations of Anomalies.

Establishing Equity Styles.

Equity Style Index Methodology.

Pitfalls of Current Equity Style Indexes.


SECTION TWO ActiveBeta Conceptual Framework.

Chapter 3 Introducing Active Betas.

Defining Active Betas.

Identifying the Drivers of Equity Returns.


Exploring the Behavior of Return Drivers.

Chapter 4 Behavior of Short-Term Earnings Expectation and the Link with Price Momentum.

Analysis Methodology.

Relationships Studied.

Decomposing Momentum Returns.


Appendix: Regression Analysis and Correlation Coefficient.

Chapter 5 Behavior of Long-Term Earnings Expectation and the Link with Value.

Relationships Studied.

Investment Horizon of Value Strategies.

Implications for Stock Risk Premium.

Decomposing Value Returns.


Chapter 6 Pricing and Persistence of Systematic Sources of Active Equity Returns.

Pricing of the Systematic Sources of Active Equity Returns.

Persistence of the Systematic Sources of Active Equity Returns.

Momentum, Value, and Risk Aversion.

ActiveBeta Framework: A Summary of Relationships.

SECTION THREE ActiveBeta Indexes.

Chapter 7 ActiveBeta Index Construction Methodology.

Investment Process Indexes.

Objectives of Investment Process Indexes.

Conflicting Objectives.

Transparency, Understanding, and Rationale of the ActiveBeta Momentum Index.

ActiveBeta Index Construction Process.

Differences in Construction between ActiveBeta Index and Other Public Style Indexes.

Achieving Objectives.


Appendix: ActiveBeta Index Construction Process Example.

Chapter 8 Historical Analysis of ActiveBeta Indexes.

ActiveBeta Index Construction Process Overview.

ActiveBeta Index Performance: Highlights.

ActiveBeta Index Performance: Detailed Analysis.

ActiveBeta Index Exposures.


Chapter 9 ActiveBeta Index Applications.

Style Investing: A New Framework.

Performance Attribution: Decomposing Active Manager Returns.

Portfolio Structuring: Revisiting the Alpha-Beta Return Separation.

Performance Benchmarking.

Research and Analysis.

Investment Vehicles.

SECTION FOUR ActiveBeta Customizable Solutions.

Chapter 10 Alternative Solutions for Capturing Active Betas.

ActiveBeta Custom Indexes.

ActiveBeta Custom Solutions.

A Word on Traditional Active Management.


Chapter 11 Concluding Remarks.



About the Authors.



Khalid Ghayur is the CEO and CIO of Westpeak Global Advisors, LP. He was director of research policy, a member of the Global Executive Committee, and chairman of the Index Policy Committee at Morgan Stanley Capital International (MSCI) Barra. Prior to this, he was global head of quantitative research and strategy for HSBC Global Asset Management. He is a CFA charterholder, has served on the Board of Governors of the CFA Institute, and is a former trustee of the CFA Institute Research Foundation. He received an MBA in finance and international business from the ¨¦cole Nationale des Ponts et Chauss¨¦es and an MA and BA in economics from the University of Karachi. Ronan G. Heaney is Director of Research at Westpeak. Before joining Westpeak, he was a software architect with Multum Information Services and a senior software developer at Swiss Bank Corp. He holds an MS in computer science from Purdue University and a BS in applied physics from Dublin City University, Ireland.

Stephen A. Komon is a Senior Portfolio Manager at Westpeak. Prior to this, he was vice president of foreign exchange and commodities at J.P. Morgan & Co., and he also held positions with UBS AG/Swiss Bank and Dean Witter Reynolds. He holds an MBA in finance and accounting from the University of Chicago Booth School of Business and a BS in commerce from the University of Virginia. He is also a CFA charterholder.

Stephen C. Platt is Director of Portfolio Management at Westpeak. Before joining Westpeak, he cofounded and was a senior vice president of Cordillera Asset Management. He holds a BS in finance from the University of Colorado Leeds School of Business and is a CFA charterholder.