Essay On Risk And Return

Markowitz (1952, 1956) pioneered the development of a quantitative method that takes the diversification benefits of portfolio allocation into account. Modern portfolio theory is the result of his work on portfolio optimization. Ideally, in a mean-variance optimization model, the complete investment opportunity set, i.e. all assets, should be considered simultaneously. However, in practice, most investors distinguish between different asset classes within their portfolio-allocation frameworks.

“The Benefits of diversification are clear. Portfolio theory has played a crucial role in explaining the relationship between risk and return where more than one investment is held. It also enables us to identify optimal and efficient portfolios.”

Harry Markowitz 1991, developed a theory of “Portfolio choice”, that allows the investors to examine the risk as per the expected returns. In modern World, this theory is known as Modern portfolio theory (MPT). It attempts to attain the best portfolio expected return for a predefined portfolio risk, or to minimise the risk for the predefined expected returns, by a careful choice of assets. Though it’s a widely used theory, still has been challenged widely. The critics question the feasibility of theory as a strategy for

The goal of this paper is to explain why CCM’s aggressive program is a good alternative to any investor looking to diversify its portfolio. The paper will be divided into three distinct parts: the operational analysis, the quantitative analysis and a comparison against its peers (including the impact of CCM in a traditional portfolio).

Meeting 09/08/11 09/13/11 09/15/11 09/20/11 09/22/11 09/27/11 09/29/11 10/04/11 10/06/11 10/11/11 10/13/11 10/18/11 10/20/11 10/25/11 10/27/11 11/01/11 11/03/11 11/08/11 Topic Class Introduction Investments: background and issues Financial securities Financial securities Securities markets Securities markets Bond prices and yields Bond prices and yields Bond prices and yields Mutual fund and other investment companies Follow Monday 's schedule (no class) Mutual fund and other investment companies Wrap up and Review Exam 1 Risk and Return Risk and Return Efficient diversification Efficient diversification CAPM and APT 1, 2, 3, 4, 9 5 5 6 6 7 HW 4 due Excel case 1 due 4 HW 3 due Chapter Homework and Excel cases (required)

Nike Inc., has a standard deviation of 8.2, almost double that of the markets. While Nike has been a consistently strong company its average rate of return for the past 10

A trade-off often shows the link connecting risk and return. Presented the opportunity amid (Garnger, 2010) "two alternatives

As indicated by the case study S&P 500 index was use as a measure of the total return for the stock market. Our standard deviation of the total return was used as a one measure of the risk of an individual stock. Also betas for individual stocks are determined by simple linear regression. The variables were: total return for the stock as the dependent variable and independent variable is the total return for the stock. Since the descriptive statistics were a lot, only the necessary data was selected (below table.)

Let us begin our discussion on Portfolio Theory with an example of two investments (assets or securities) – Ace and Bravo. Their return expectations are given in the table below. You will notice that both Ace and Bravo are risky investments because they do not offer a certain return. You can begin by comparing the expected return and risk of Ace and Bravo:

The capital asset pricing model (CAPM) was proposed by Sharpe (1964) –Lintner (1965) whom had relied on the Markowitz mean–variance-efficiency model, in the mean – variance –efficiency model investors are supposed to be risk-averse during one time period and they only care about the expected returns and the variance of returns (risk). These investors choose only efficient portfolios with minimum variance, given expected return, and maximum expected return, and variance. The Expected returns and variance plot a parabola, and points above its global minimum identify a mean–Variance - efficient frontier of risky assets.

characterize the risk and return features of these investments  Determine the expected return and risk of portfolios that are constructed by combining risky assets with risk-free investment in Treasury bills  Evaluate the performance of a passive strategy

Whether it is investing, driving or just walking down the street, everyone exposes themselves to risk. Your personality and lifestyle play a big role in how much risk you are comfortably able to take on. If you invest in stocks and have trouble sleeping at night, you are probably taking on too much risk. (For more insight, see A Guide to Portfolio Construction.) Risk is defined as the chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment.

As a general rule, how you diversify your investments has a lot to do with how well you understand the relationship between risk and return and the level of risk and return you’re looking for.

In this section, Lee Wai (2001) briefly explained characteristics of the four well-known risk based portfolio construction methods - Equally Weighted Portfolio, Global Mean-Variance Portfolio, Most Diversified Portfolio, and Risk Contribution Portfolio.

The concept of portfolio management is a lucrative sword as not only it offers not only returns but the investor also have to face risk associated with it. If the Investor is willing to earn higher return he has to associate higher return with higher risk. For an investor to diversify away the risk he can follow diversification rule. Under diversification, investor can include the assets which are not correlated to each other and thus by including these asset classes he can diversify away the risk. However, in terms of the risk there are two kinds of risk i.e Unsystematic Risk and Systematic Risk and an investor can diversify only unsystematic risk by following diversification rule including the asset classes