Whether therefore you eat, or drink, or whatsoever you do, do all to the
glory of God.
- I Corinthians 10:31

Frequently Asked Questions

11. How does FFI use MPT?

We use Modern Portfolio Theory (MPT) in three ways:

  1. Stock Selection. We prefer faster growing companies with stable operations that we hope will contribute to rapid portfolio growth (high alphas – preferably over 15) and low volatility (low betas – preferably under 1.0). The company businesses and operations must, of course, be consistent with biblical values.
  2. Portfolio Design. We analyze our diversification decisions by considering sector, industry, style and size data from Snapshot reports that are provided by Morningstar software. In addition to a portfolio with a high alpha and a low beta, we seek a high Sharpe ratio, preferably above 1.5, well above the benchmark. A high Sharpe ratio results from a low standard deviation (preferably below the benchmark) and a high historic return (often over 20%). The Snapshot report can also be used to test the impact of different stocks in the portfolio.
  3. Portfolio Management. We monitor the MPT data for an indication of the likelihood that our risk-adjusted return objectives will be achieved. For example, beginning in the second quarter of 2006, the 3-year beta began to exceed 1 and the 3-year standard deviation also rose above the benchmark, while the portfolio performance deteriorated, lagging behind the S&P 400 benchmark. This prompted a comprehensive review. Except for a few companies, the outlook seemed intact. Therefore, we elected to exercise patience. Subsequent improved performance affirmed the wisdom of this decision that utilized MPT data for background analysis.

Based on MPT research, we think that mid-cap stocks can outperform large cap stocks by 1-3% over the long term.

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