Efficient Market Theory As It Essay

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For one, as the article indicates, the fund manager would have to adjust the portfolio holdings constantly to diversify all the portfolio risk imbedded in his investments. As asset prices change constantly throughout the day, it will alter the portfolio manager's strategy under the CAPM model. This results in the subpar performance experienced by quant managers due to transactions cost and capital gains taxes. Furthermore the non-liner interactions with agents make the reliability of regression analysis questionable as well.

In addition, page 4 of the article indicates that differing market sentiments regarding quant managers (Frank, 2008). As the article indicates, value investing is favored during periods of mass pessimism. However, when markets are optimistic, quant fund managers are preferred by overall investors. As page 4 of the article indicates, quants are underperforming due to the mass use of data to make overall investing results. Furthermore, data is now easily manipulated so it difficult for fund managers to delineate between quality data.

On page 7 of the article, Frank discusses the concept of reversion to the mean. Reversion to the meal has very profound impact on the performance of all fund managers alike (Frank, 2008).

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It is customary in the financial markets to "chase performance." Typically, the fund with superior returns attracts large amounts of capital. As a result, the fund manager must deploy these funds in riskier positions in order to maintain his high rates of return. As such the large the inflow of funds, the more difficult it is to maintain the high rates of returns that attracted the funds to begin with. On page 9, the article indicates the large amounts of cash inflows to quantitative funds relative to others over the past years. This, to some extent has created the subpar performance many funds have experienced as the article indicates on page 9. Page 10, of the article provides a graphical representation of cash inflows (Frank, 2008). As time moves forward, eventually, outstanding performance will eventually revert to the average of the markets. This occurs with size as it does with time. As was the case with many of the funds who experienced exceptional performance, the influences of efficient markets and large cash inflows, have created performance roughly in line with peers......

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