Portfolio theory

appropriate required rate of return of an asset in finance field, providing information to investor to make decisions about investment portfolios and guide investors’ investment behaviours (McLaney, 2006). The CAPM was invented by William F. Sharpe, John Lintner and Jan Mossin, basing on the earlier work of Harry Markowitz on diversification and modern portfolio theory, and now it is universally applied (Vernimmen, et

prefer uncertain losses to certain losses. 2.investors exhibit biased expectations, due to overconfidence in their ability to forecast the future. 3.investors construct portfolios via asset segregation, meaning that they tend to focus on an asset’s individual investment features versus its impact on the overall portfolio position By admitting his mistake but reiterating other projections, one used the "single predictor" defense. Feeling that they should spread out their risk, but not

risk corresponds to a lower return. Moreover, investment risk can be substantially reduced through diversification, which spreads a portfolio across different industries, businesses and investment options. The makeup of a diversified portfolio continually changes based on an investor’s time horizon and investment goals. In accordance with the Modern Portfolio Theory (MPT), one can maximize return while reducing risk, through assessing investments standard deviation and beta. When applied to the

Economics of Corporate Finance Capital Asset Pricing Model is the foundation stone of modern finance theory. It reveals the basic operation rules of the capital market and it is important in market practice and theory research(). By use of this model, the relation between risk and expected return is accurately predicted, and provides a method to estimate the yield of potential investment projects and help us to predict the expected rate of return of market in future. Although the Capital Asset Pricing

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. Those of us who work hard for every penny we earn

1. INTRODUTION This report aims at implement two distinct approaches, which can indicate the expected return and risk of a two-stock portfolio, to generate a practical solution to risk-analyzing for stock-investing. The two approaches are Mean-Variance Approach and CAPM Approach. While we apply the Mean-Variance Approach to determine the expected return and standard deviation, we employ the CAPM approach to measure the beta and expected return of each stock. The calculations of the aforesaid mathematical

to use a long-term average value for ERP. Beta values are now calculated and published regularly for all stock exchange-listed companies. Beta is not a constant value, and it changes over time. There are several assumptions of the CAPM model. The theory assumes: i) securities markets are efficient and highly competitive, ii) these markets are dominated by rational, risk-averse investors, who seek to maximize return from their investments. (Mullins Jr., 1982). According to Mullins Jr. (1982), CAPM

Modern Finance Theory Septtember 2013 Berkshire Hathaway Phenomenon In the Context of Modern Finance Theory Introduction Over the 46 years ending December 2012, Warren Buffett (Berkshire Hathaway) has achieved a compound, after-tax, rate of return in excess of 20% p.a. Such consistent, long term, out performance might be viewed as incompatible with modern finance theory. This essay discusses the Berkshire Hathaway phenomenon in the context of modern finance theory. Part 1 Modern

Portfolio Performance Evaluation and Attribution Analysis Date of Submission 22nd June, 2011 Portfolio Performance Evaluation and Attribution Analysis Submitted to: Mahmood Osman Imam, Ph.D. Professor Department of Finance University of Dhaka Submitted by: Sakib Ahmed Chowdhury B.B.A. 13th Batch Section: A, ID: 13-161 Group # 9 Department of Finance University of Dhaka 22nd June, 2011 Dr. Mahmood Osman Imam Professor Department of Finance Faculty of Business Studies

Introduction This paper aims to analyze the validity of the CAPM model of predicting returns for stocks by empirically testing the model with past financial data. The CAPM model is defined as R_i=r_f+ β_i (R_m-r_f). R_i represents the return on stock i, and is what the CAPM model attempts to define or predict. r_f represents the risk free rate available at the time the model is being analyzed, a figure that’s important for understanding both minimum return figures and the return premium offered by