is to do so succinctly yet in a manner designed to emphasize the economic content of the theory. Following this, I modify the model to reflect an extreme case of an institutional arrangement that can preclude investors from choosing fully optimal portfolios. In particular, I assume that investors are unable to take negative positions in assets. For this version of the model I draw heavily from papers by Glenn (1976), Levy (1978), Merton (1987) and Markowitz (1987, 1990). Finally, I discuss the stock
Words: 9378 - Pages: 38
Cheryl Mew FINS2624 – Portfolio Management Semester 1, 2011 L ECTURE 1 – B OND PRICING W HAT 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. Transaction date: T Settlement date:T+2 Coupon payment dates
Words: 14579 - Pages: 59
five funds based on the sharpe ratio, and Jensen alpha calculations. I also compared the result to the earlier analysis done based on average return, standard deviation and beta. Sharpe ratio, measures investment performance of the portfolio compared to risk taken. It’s most appropriate to use when evaluating diversified portfolios. Sharpe ratio penalizes non-diversified portfolios by also taking into account unsystematic risk. The high sharpe ratio represents the better performance for taking
Words: 523 - Pages: 3
the “risk-free” rate of return Portfolio Risk • Portfolio – a collection or grouping of investment securities or assets • Efficient Portfolio 1) Maximize return for a given level of risk 2) Minimize risk for a given level of return • Portfolio Return … the expected return on a portfolio, kp, is the weighted average of the expected returns on the individual stocks in the portfolio … the portfolio weights must sum to 1.0 … the realized rate
Words: 5130 - Pages: 21
Pricing Model (CAPM) Prof. Alex Shapiro Lecture Notes 9 The Capital Asset Pricing Model (CAPM) I. II. III. IV. V. VI. Readings and Suggested Practice Problems Introduction: from Assumptions to Implications The Market Portfolio Assumptions Underlying the CAPM Portfolio Choice in the CAPM World The Risk-Return Tradeoff for Individual Stocks VII. The CML and SML VIII. “Overpricing”/“Underpricing” and the SML IX. X. Uses of CAPM in Corporate Finance Additional Readings Equilibrium Process
Words: 1605 - Pages: 7
‘ Investment Analysis & Portfolio Management Sharpe’s Single Index Model Practice Sheet -2 | |1. Betas of two stocks are 0.73 and 1.20 respectively. If the standard deviation of the market returns is 15.49%, the covariance between | | | |the two stock’s return is | | | |(a) 175.20(%)2 (b) 210.20(%)2 (c) 288.20(%)2 (d) 328.76(%)2 (e) 345.60(%)
Words: 937 - Pages: 4
assessment of its risk. SYSTEMATIC AND UNSYSTEMATIC RISK If an investor has a portfolio of investments in the shares of a number of different companies, it might be thought that the risk of the portfolio would be the average of the risks of the individual investments. In fact, it has been found that the risk of the portfolio is less than the average of the risks of the individual investments. By diversifying investments in a portfolio, therefore, an investor can reduce the overall level of risk faced. There
Words: 1805 - Pages: 8
University of New Orleans, USA Carl B. McGowan, Jr., Norfolk State University, USA Susan E. Moeller, Eastern Michigan University, USA ABSTRACT In this paper, we demonstrate how to compute the required rate of return for Coca-Cola using modern portfolio theory with data downloaded from the internet. We demonstrate how to calculate monthly returns for the index and Coca-Cola and how to use the returns to compute the beta coefficient and the required rate of return using the downloaded data. We show
Words: 3716 - Pages: 15
HMC Case Study (1) “Over the long term, the portfolio had soundly outperformed both a 60% stock/40% bond portfolio as well as the TUCS median, and this outperformance improved over time.” The average outperformances versus the 60/40 and TUCS over the last 30 years are 2.8% and 2.9%. (2) For HMC to construct the stress test, I think the concept of “modern portfolio theory (CAPM),” “return on asset classes” and “portfolio returns” are required. Equation: E(R)= ∑p(s)R(s) σ2= ∑p(s)[R(s)-E(r)]2
Words: 602 - Pages: 3
asset held in isolation, risk is measured with the probability distribution and its associated statistics: the mean, the standard deviation, and the coefficient of variation. The concept of diversification is examined by measuring the risk of a portfolio of assets that are perfectly positively correlated, perfectly negatively correlated, and those that are uncorrelated. Next, the chapter looks at international diversification and its effect on risk. The Capital Asset Pricing Model (CAPM) is then
Words: 7593 - Pages: 31
