Risk Factor Based Portfolio Investment Strategies

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CHAPTER 1 INTRODUCTION INTO RISK-FACTOR BASED PORTFOLIO INVESTMENT STRATEGIES 1.1 What is factor-based investing? Consider one of the most urgent problems of modern financial management, namely portfolio management. Analysis of this issue primarily is interesting for the head of analytical department of banks and investment companies and private investors. Risk (also found in the literature, the term total risk) of stockssecurities is the uncertainty of its income at the end of the investment period. Risk is measured by the dispersion of the yield of a security over a fixed time interval, for example, month, quarter, year, and so on. The definition of risk is the most common, although there are others. A systematic or market risk of…show more content…
The regression coefficient is called the beta of the security and it is a characteristic of its market risk. The index which adequately reflects the state of the economy in whole and includes share prices of large companies in various market sectors is taken as a market index. Typically, the basis for calculating the index capitalization is taken of its constituent securities. This interpretation under review of the overall risk of a security as the sum of proper and improper risk is not the only one. Often, the overall risk is represented as a sum of three terms, where the third component acts as a risk sector to which the company. Finally, you can use a multi-factor model. For the investment portfolio beta is calculated by adding the betas of its constituent securities, multiplied by the corresponding weight (weight of each security in the portfolio is equal to the quotient of the total value of its portfolio to the value of the total portfolio). The most interesting finding in terms of portfolio management lies in the fact that a well-diversified portfolio does not have its own risk. A change of its yield equals to the change of yield market index multiplied by the beta portfolio. This means that the behaviour of a well-diversified portfolio of nothing (up to multiplication by a constant) differs from behaviour of the market index. The main task, set and
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