Portfolio theory

efficient diversification implies that for an investor wishing to efficiently assume risk in their portfolio; the risky part of the portfolio should consist of weighted proportions of all possible risky assets.” Abstract: Minimizing investor’s portfolio risk was a dominant goal influencing decision making of investment. The effective method of reducing risks was to efficient diversifying the portfolio. The author’s purpose in this article was to share thoughts and concerns about the statement and

The role of risk-free rate in the financial analysis is of vital importance because it allows the cost of both equity and total capital to be assessed. For a particular security to be characterized as risk-free, the actual returns should always be equal to the expected one. The aforementioned fact presupposes the satisfaction of two criteria: The first indicates that the stock is free of default risk and the second declares that there can be no reinvestment risk (Damodaran 1998). However, no security

Cheryl Mew FINS2624 – Portfolio Management Semester 1, 2011 LECTURE 1 – BOND PRICING WHAT IS A BOND? A bond is a claim on some fixed future cash flows. A commonwealth government bond (CGB) is a bond which pays semi-annual coupons, in which the maturity date/ coupon payment date is on the 15th of every month. A zero coupon bond is a bond with no coupons. The important information of a bond: 1. 2. 3. 4. 5. 6. • 1. 2. Transaction date: T Settlement date:T+2 Coupon payment dates Maturity date

Risk Based Portfolios 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. First, the equally weighted portfolio is the simplest portfolio construction approach that gives all assets same weights (Lee, 2011). Lee described the portfolio as the most heuristic portfolio because it completely ignores

Markowitz Portfolio Theory Conditions: 1. If returns are normally distributed, expected return and standard deviation are the only two measures that an investor need consider. 2. Combining stocks into portfolios can reduce standard deviation, below the level obtained from a simple weighted average calculation. 3. Correlation coefficients make this possible. 4. The various weighted combinations of stocks that create this standard deviations constitute the set of efficient portfolios. •The expected

plan. The Group business plan is based on a number of assumptions relevant for the industry, such as economic growth of their key markets, fuel price and exchange rates. QUESTION 1 Beta is a measure of the market risk of a security or a portfolio in comparison to the market as a whole. It is used in the Capital assets pricing model (CAPM), which calculates the expected return, and assets based on its beta and expected market returns. The market beta is set at 1.00 and every stock is calculated

with Priceline; Visa is more correlated with Priceline than it is with Disney. When it comes to portfolios, correlation describes the degree of relationship between the price fluctuations of those assets included in the portfolio. Securities with the perfect negative correlation would build a most diversified portfolio. By contrast, the worst diversified portfolio’s correlation is +1. Among three portfolios we have built up with each two companies, the most diversified one is Disney with Priceline while

Games. | Market | Games | Outplace | Standard Deviation | 12.12% | 8.32% | 3.54% | Beta | 1 | 1.75 | 1.5 | CC | | 0.6188 | -0.6345 | R2 | | 0.3829 | 0.4031 | Beta measures the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. A beta of 1 indicates that the security's price will move with the market. A beta less than 1, means that the security’s price will be less volatile than the market. A beta greater than 1 indicates that the

investors would like to minimize risks of stock trading process, the portfolio investments are vital to be concentrated on (Anghelache & Anghelache, 2014:8). Besides, Goetzmann & Kumar (2008:433) also stated that portfolio investment is a great choice for investors to eliminate risk. This study has provided simulation of investment and process of establishing a portfolio. According to Markowitz (1952:77), the rule of portfolio selection is investors should maximize the value of the future profits

large companies. Yet, many economists argue that this model has its own drawbacks. In 1992, Fama and French said that the application of CAPM could be useless which against empirical tests of the CAPM. For instance, the CAPM was seen as an obsolete theory because of the limitation of its assumptions. Main assumptions can be categorized into six aspects. First, the CAPM assumption was built on that the capital market is always in equilibrium. This assumption is difficult to achieve in the real world