AC 3047 CORPORATE FINANCE Lecture #1: Introduction Portfolio theory Intro to CAPM ©Professor Hans K. Hvide Do not quote without permission. Although considerable effort will be exerted to avoid errors in these notes, I do not guarantee that they are error-free. 1 Central concepts for this week • Risk-return trade-off • Covariance (between individual assets) • Efficient Frontier • Market portfolio (choice of the rational investor) ↓ • Capital Market Line • Security Market
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will assume the role of a portfolio manager. As part of your new assignment, you have seven stocks under management. Your task is to determine how your seven stocks are performing in your portfolio. Your first set of analysis will focus on the assumption that there are no short sale constraints on your holdings and one smaller set of analysis that will focus on the effect of a short sale constraint on your performance. Portfolio Theory Analysis 1. Perform a portfolio analysis for your seven
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known as unsystematic risk. This risk is unique to the specific security and affects a single asset or small group of assets. In contrast to systematic risk, which is the market risk that affects the larger number of assets. Unsystematic risk of a portfolio can be brought down to zero through diversification whereas systematic risk cannot be diversified. This can be further elaborated with the help of an example. A sudden rise in inflation affects all the companies by lowering the real return of all
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Investments team project KUBS Investment Fund Manager Group 14 (Step 1) For the convenience of problem solving, we solved the problems in following orders: a–c–e–b-d. a) The yearly expected return: First, find the weekly return for each stock by using the formula of: rᵢ=p₁-p₀p₀ Second, for each of the stock, add all of the weekly return and then divide by the number of sample (from Oct 27, 2005 until Oct 19, 2015) to get the average of weekly return. rw=1mnί=1mnrᵢ (where mn is 521) Third
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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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буурах, өгөөж нэмэгдэх, хөрөнгө оруулагчдын сэтгэл зүй тогтвортой байх, ханшийн хэт хэлбэлзэл буурах, цаашлаад хөрөнгийн зах зээлд хөрөнгө оруулагчид нэмэгдэх улмаар хөрвөх чадвар сайжирч, зах зээл идэвхжих чухал ач холбогдолтой. Түлхүүр үгс: Modern Portfolio Theory, Behavioral Finance, C programming language, Visual Studio Хөрөнгө Оруулагчийн Санхүүгийн Хэрэгцээ, Чадамж, Хувийн Зан Төлөвт Нийцсэн Оновчтой Багц Бүрдүүлэх “MB 1.0” Программ ГАРЧИГ I. СУДЛАГДСАН БАЙДАЛ ..........................
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sale, margin, margin call • Unique, firm-specific diversifiable, nonsystematic risk • Market risk, beta, systematic, nondiversifiable risk • Modern portfolio theory • leverage • Minimum variance frontier, efficient frontier, global minimum variance portfolio, • Riskless asset, risky asset, optimal risky portfolio • Capital allocation line • Sharpe ratio Problems • See lecture slides and homework for clarification • Buying on margin • Short selling
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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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this project, you are going to evaluate the systematic risk of an investment portfolio. It can be an imaginary portfolio that you would like to put together to park your retirement savings, or your real 401(k) portfolio. To simplify the project, we are not going to include bonds, ETFs, mutual funds, etc. Or in other words, we are going to investigate a portfolio composed of only stocks. For example, your ideal portfolio can comprise the following stocks: IBM (5%), APPL (5%), GOOG (10%), DIS (10%)
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