• This chapter sets forth the principles of modern portfolio theory. • The expected return and variance on a portfolio of two securities A and B are given by • By varying wA, one can trace out the efficient set of portfolios. We graphed the efficient set for the two-asset case as a curve, pointing out that the degree of curvature reflects the diversification effect: the lower the correlation between the two securities, the greater the diversification. • The same general shape holds
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security’s non-diversifiable risk and diversifiable risk is called total risk. Systematic risk is beyond the control of shareholders and cannot be alleviated to a large extent. Dissimilarity to this, the unsystematic risk can be alleviated through portfolio diversification. It is a risk that can be avoided and the market does not pay for taking such risk. Explain why the total risk of a
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realized return is the amount of actual gains that is made on the value of a portfolio over a specific evaluation period. This takes into consideration any earnings generated by each of the assets contained in the portfolio, as well as any losses that were incurred as a result of a shift in the value of the individual assets. It is possible to identify the realized return associated with each asset that is held in the portfolio. Components of realized return are expected return, changes in expectations
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China's State Capitalism Trap The current international financial economic issue being witnessed is state capitalism. This is a situation where the government owns most of the profit generating enterprises, controlling the shares, acts as a large capitalist and principal shareholder. State capitalism is evident in China, and it is escalating as a threat to its economic growth. China’s powerful companies like, China Mobile, Sinopec, and PetroChina are largely controlled by the state. According
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TOPIC THREE PORTFOLIO THEORY AND CAPITAL ASSET PRICING MODEL (CAPM) Reading : BKM: Chapters 7&9 Pilbeam: Chapters 7&8 OUTLINE Section I: The concept of portfolio and diversification Calculate portfolio expected return Measuring portfolio total risk: variance and standard deviation Market portfolio Measuring systematic risk: Beta Section II: Markowitz Portfolio Theory Efficient portfolio and Efficient Frontier Capital Asset Pricing Model - CAPM CAPM lines: CML and SML
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allocation program that currently includes only stocks, bonds, and cash alternatives (risk-free-money market investments), which of the properties of real estate returns affect portfolio risk? Explain. a. Standard Deviation b. Expected Return c. Correlation with the returns of other assets (a) and (c). The portfolio risk (standard deviation) calculation now includes the variance of real estate returns and correlation between real estate and stocks the correlation between real estate
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Problem 1: Marketing selection problem Hua Ann is running for reelection as mayor of a small town in Alabama. Khurai Jum, Ann’s campaign manager during this election, is planning the marketing campaign, and there is some stiff competition. Jum has selected four ways to advertise: telvevision ads, radio ads, billboards, and newspaper ads. The costs of these, the audience reached by each type of ad, and the maximum number of each is shown in the following table TYPE OF AD | COST PER AD | AUDIENCE
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original investment. Efficient frontier: The set of portfolios that have the highest expected return for any given level of risk is known as the efficient frontier. Investors aim to find the efficient frontier which represents portfolios with highest return for a given level of risk. Optimal portfolio: The optimal portfolio is the point of tangency between the efficient set and the invester’s risk-return indifference curve Market portfolio: a portfolio made up of all the assets in the economy with weights
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attractive asset to hold as a part of a portfolio. If the correlation between gold and stocks is sufficiently low, gold will be held as a component in a portfolio, specifically, the optimal tangency portfolio. Efficient frontier Efficient frontier b. Given the data above, re-answer part (a) with the additional assumption that the correlation coefficient between gold and stocks equals 1.0. Draw a graph illustrating why one would or would not hold gold in one’s portfolio. Could this set of assumptions
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M.I.T. Sloan School of Management Spring 1999 15.415 First Half Summary Present Values • Basic Idea: We should discount future cash flows. The appropriate discount rate is the opportunity cost of capital. • Net Present Value: The net present value of a stream of yearly cash flows is N P V = C0 + C1 C2 Cn + + ··· + , 2 1 + r1 (1 + r2 ) (1 + rn )n where rn is the n year discount rate. • Monthly Rate: The monthly rate, x, is x = (1 + EAR) 12 − 1, where EAR is the effective annual rate. The EAR
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