firm-specific risk e. either firm-specific or market risk 1. a and e 2. a and c The portfolio risk is calculated through the standard deviation of the portfolio. It includes the variance of the real estate, the correlation/covariance between real estate and stocks, the correlation/covariance between real estate and bonds. 3. Only a is valid. 1. Valid. Since it is the minimum variance portfolio of risky securities, its variance must be the lowest than those of all other securities.
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The averaging out of independent risks in a large portfolio is called diversification. The principle of diversification is used routinely in the insurance industry. In this paper I will talk about two different types of home insurance and talk about the different risks associated with each. Discussion A portfolio is used to describe a collection of securities. In finance, the risk of an individual security differs from the risk of a portfolio composed of similar securities. In order to help
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Assignment 3 1. Design a multifactor model with at least 2 factors besides the market factor, and answer the following questions. a) What makes your choice of factor a “factor” in multifactor model? b) Does the factor of your choice co-move with the market factor? If yes, should you include it along with the market factor? c) Describe how the stock return would be affected when the factor of your choice changes. d) Describe a scenario where one can benefit from trading
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Are you a Marksman Trader? Use Sharpe ratio to know A marksman is a person who is skilled in shooting at a mark with great precision. They are trained hard to shoot at a target at various distances under variable environmental conditions with deadly accuracy. They are consistent shooters. Likewise, in trading, you can see for yourself if you are a precision trader. You would use a Sharpe ratio. Most traders fail to use this performance metric to their advantage. The main reason is that when anyone
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Portfolio Performance | Given Return 6% Monthly | | Max Θ No SS | Max Θ with SS | Min Risk SS | Min Risk No SS | Max Θ No SS | Max Θ with SS | Min Risk SS | Min Risk No SS | Portfolio Return (μ) | 0.8500 | 1.0125 | 0.4102 | 0.4371 | 0.7200 | 0.7200 | 0.7200 | 0.7200 | Rf | 0.0573 | 0.0573 | 0.0573 | 0.0573 | 0.0573 | 0.0573 | 0.0573 | 0.0573 | σ portfolio | 0.3294 | 0.1709 | 0.1038 | 0.1060 | 0.1253 | 0.1251 | 0.1251 | 0.1253 | Market Return | 0.1157 | 0.1157 | 0.1157 | 0.1157 | 0.1157
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CAPITAL ASSET PRICING MODEL What is CAPM actually? Capital Asset Pricing Model, popularly known as CAPM, is a model that provides a framework to determine the required rate of return in an asset and indicates the relationship between return and risk of the asset. This definition is given in books. Collectively it is somewhat indiscernible. We will dissect the definition. It is commonly known that the higher the risk, the higher the return. Now, suppose we know how much risky the asset is
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Review on Modern Portfolio theory Historical development and current state of theory: Modern Portfolio theory is developed by Markowitz (1952, 1959). Portfolio problem has been formulated as an option of the variance and mean of an asset portfolio. If investors concern on the return distributions for a single period, the mean and variance portfolio theory need to be developed to find the optimum portfolio. Then the investors need to find out the mean and the variance of return for each asset
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it is often used to evaluate realized performance for a diversified portfolio. Because it's assumed that the portfolio being evaluated is a diversified portfolio (meaning that the unsystematic risk has been eliminated), and because a diversified portfolio's main source of risk is market risk (or systematic risk), beta is an appropriate measure of that risk. Alpha is used to determine by how much the realized return of the portfolio varies from the required return, as determined by CAPM. The formula
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result is that the systematic risk (beta) of the average Hong Kong stock from a U.S. perspective is only 0.85, compared with a beta of 1.0 for the average U.S. stock. In other words, diversifying into Hong Kong stocks will reduce the riskiness of a portfolio currently concentrated in U.S. stocks. 2. What characteristics of foreign securities lead to diversification benefits for American investors? ANSWER. The two basic characteristics are: a) Many foreign securities are issued by companies
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risk, is the company-specific or industry-specific risk in a portfolio, which is uncorrelated with aggregate market returns. Unsystematic risk can be mitigated through diversification, and systematic risk can not be.[1] Systematic risk should not be confused with systemic risk, the risk of loss from some catastrophic event that collapses the entire financial system. Contents [hide] * 1 Example * 2 Systematic risk and portfolio agement * 3 References * 4 See also | -------------------------------------------------
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