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It's Hard to Distinguish
Skill from Luck

Seven Quantitative
Insights into Active
Management -
A Summary



Forecast Return
Distribution in Aegis
Risk Manager 2.0

The Market
Impact Model™ - Part 3

Automating the
Investment Process



Ron Kahn Looks
Back on 11 Years
at BARRA


The BARRA Brainteaser
for Summer 1998
Solution to the Spring
1998 Brainteaser



A Beautiful Mind

The BARRA Brainteaser for Summer 1998

Cab-driver-turned-stock-market- disciple Wade B. Cook offers “guaranteed” get-rich-quick courses to individual investors. His investment philosophy relies on technical analysis, high turnover, and leverage; and his courses cost $4,000 to $5,000 to attend.

This Brainteaser is concerned not with his philosophy or fees, but with Cook’s money-back guarantee. He promises seminar attendees that within three months of their taking his course, at least three stocks listed on his stock-tip website will exhibit annualized returns of at least 300%—or he will return their course fees. Company spokesmen brag that no one has ever collected.

Assuming that all stock returns are independent, normally distributed, with expected annual returns of 12% and risk of 35%:

1. What is the probability that over one quarter at least three stocks out of 500 exhibit annualized returns of 300%?
2. How many stocks must his website include for that probability to be 50%?
3. Identify at least two real-world deviations from the above analysis and discuss how they would affect the calculated probabilities.

You may send solutions to the BARRA Brainteaser to:

Eugene Reznik
E-mail: eugene.reznik@barra.com;

fax: 510.548.4374

mail:
BARRA 2100 Milvia Street
Berkeley, CA 94704-1333
United States.