The Optimal Market Portfolio (OMP)

Vance, D. E. (2003) states that it is another way to think about the risk of leading to, or investing in a company. These two companies both experienced a drop on this ratio from 2004 to 2005, 0.35 for WOW and 0.3 for CML in 2005.

2. Beta, which is a measure of systemic risk, is a good indicator of how volatile a stock is relative to the market and it is a significant measurement to focus on when trading because the higher the beta, the greater the risk you gain in your portfolio. It is also important to make sure you allocate a lot of your money into commodities; their betas are usually low which is a good thing, especially if you are a risk-adverse investor. Conversely, higher beta stocks may be more volatile but they have the potential to generate higher returns then stocks with lower betas.

There are several other ratios that should be considered in an investment context including P/E ratio, debt to equity ratio, dividend yield and asset turnover ratio. P/E ratio indicates how much money an investor is willing to pay to acquire one unit of a company based on the earnings. The ratio is often indicates whether a company is overvalued or undervalued. A high P/E ratio is a sigh that investors expect the company to provide higher returns in the future. Thus, this ratio enables potential investors to understand market sentiments towards a

The beta of a stock measures the risk of the stock. However, is not not just any risk, it is the risk that you should expect to be rewarded for

The correlation between the market portfolio and HML and the correlation between intercept and HML is -0.335 and -0.070, which indicates a moderate negative relationship between market portfolio and HML, and weak negative relationship between intercept and HML. Also, the correlations between the market portfolio and SMB, and between the SMB and HML are 0.348 and 0.191 respectively, which means that there are some positive relationships between them.

Diversity investment among stock markets, bounds and nationally and internationally is the best me method of maintaining the risk of investment and expanding its growth. The fourth importance is the cost of single investment; the less money an investor pay; the more financial resources will have to take advantage on future investment opportunities that expand the return. Becker’s final advice of investment success was for investors to slick with their plan. “Lethargy bordering on sloth remains the cornerstone of our investment style”, Warren Buffett. Many investors get influenced by what goes around them and the media to end their investment prematurely or get involved in risky commitment outside of their goals.

The beta coefficient is a measure of a stock’s market risk, or the extent to which the returns on a given stock move with the stock market.

      Beta: is seen as an ‘index of responsiveness’ of changes in a security’s returns relative to changes in returns on the market, in this case is sport utility industry)

future performances and ends with the choice of portfolio. This paper is concerned with the

To reduce a firm’s specific risk or residual risk a portfolio should have negative covariance or rather it should have no variance at all, for large portfolios however calculating variance requires greater and sophisticated computing power. As such, Index models greatly decrease the computations needed to calculate the optimum portfolio. The use of such Index models also eliminates illogical or rather absurd results. The Single Index model (SIM) and the Capital Asset Pricing Model (CAPM) are such models used to calculate the optimum portfolio.

Diversification is a widely embraced investment strategy that helps ease the unpredictability of markets for investors (Graham Kenny, 2009). It has the key benefits of reducing portfolio loss and is particularly important during times of increased uncertainty (Craig L. Israelsen – 2010). Harry Markowisz (1952) stated that “by investing in more than one stock, an investor can gain in the benefits”. Modern Portfolio Theory provides the academic base for diversifying portfolios. MPT stated that it isn’t enough for a company to just rely on the expected risk and return of one particular stock. MPT also stated that when diversification created value to

According to the CAPM model:R_i=α+βR_m+ε, α represent the abnormal return gained by the portfolio. If the market is efficiency, the α has to be zero.

Beta is an effective measure of risk. Unlike standard deviation, beta is a measure of a stock’s systematic, or market risk, which cannot be diversified away. To investors, it is considered to be the most important measure.

A well diversified investor is at an advantage when participating in the investing of securities because the more diversified he or she is, the less unsystematic risk he or she will have to deal with. The reduction of risk is a fundamental principle in risk management. There are different methods of analyzing the risk of an equity security; some highlighted in the previous questions (6-10) show that the mean return of a company called Zemin Corporation is at 24% annually. The standard deviation of this expected return is 3.46. Also, we know that its beta is 1.54. Both its standard deviation and beta are relatively small for such a high return. With this much data available, a large amount of risk management techniques and formulas can be utilized to determine if this investment is worth partaking in. The capital asset pricing model for example, shows an investor an appropriate return for the amount of systematic risk that would be undertaken by the investor for purchasing the security. This systematic risk is the beta. The Sharpe ratio is another method of analyzing the risk of an investment. It takes the historical annualized return and subtracts the risk free rate from it. This excess return is then divided by the standard deviation (which is seen in investing as a level of uncertainty or risk) to find how much excess return per

The objective of any portfolio manager is to maximize return for a given level of risk, or minimize risk to achieve a certain level of return. The objectives relate to making decisions about the investment mix, matching investments to objectives, and balancing risk versus performance (CFA Society, 2010).