Modern portfolio theory

with high return as well as the low risk with lower return. The risk can be classified into two types which are systematic (uncontrollable) risk and unsystematic (controllable) risk. The examples of systematic risk are the interest rate risk, inflation risk, foreign exchange risk, country risk, political risk and market risk. Meanwhile, the example of unsystematic risk is business risk, liquidity risk and credit risk. However, all this risk can be diversified which by creating a well-diversified portfolio. This diversified portfolio and mostly aimed by investors in order to reduce their risk towards their investment and to diversify the unsystematic risk. According to Shaji (2012), he stated that Modern Portfolio Theory only consists of systematic or uncontrollable risks. The reason was because not all the investment having the same degree of risk. Therefore, Modern Portfolio Theory was consisted of two theories which are Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT). CAPM was created…

STUDENT NAME: Duc Thinh Vu INSTRUCTOR: Mark Franich SUBJECT: Investments ASSIGNMENT 1 BF016 Investments Assessment 1 – Case Study (Individual) The role of finance is explained through the analyzing of financial to distinguish the different of finance theories. Finance theory including studying the different ways via individuals raise funds and businesses, spend those funds in the most profitable ways, and invest the excess in portfolios that reap the best…

Managing Investment Growth In order to effectively grow an investment, it is important to analyze risk and diversify securities, to maximize a portfolio to match the goals of the investor. Through analyzing the different classes of risk, one can match investments to an investors risk tolerance and return requirements. While some investments may present greater risk they are countered by a higher rate of return and vice versa, less risk corresponds to a lower return. Moreover, investment risk…

Asset pricing theories help us to find out risks of assets and provide us with a framework to associate risks of assets with their expected returns. A large number of theories and models have been prevailed to relate the risk and return of various assets to aid practitioners in selecting investment portfolio. These theories include Arbitrage Pricing Theory (APT) and the Capital Assets Pricing Model (CAPM). The Arbitrage Pricing Theory is a theory developed by Stephen Ross (1976) and was later…

The modern portfolio theory was based on risk and return trade-offs and was developed in earlier works of Harry Markowitz (1952, 1959) and Roy (1952). According to Markowitz (1952), risk can be eliminated through diversification by spreading the wealth across the assets. In his work, Markowitz (1959) implemented the theory of mean-variance of market portfolio which provided the initial foundation for capital asset pricing model. His model was a static model which assumed that investors tend to…

Alternative Asset Pricing Models Arbitrage Pricing Theory (APT) was developed by Stephen Ross (1976) as an alternative model to overcome some of the weaknesses that have been found in the CAPM. The APT is based on the Law of One Price. This means that if two assets have the same risk, theoretically they should have the same expected returns. If their expected returns differ, arbitrageurs would be able to create a long-short trading strategy that would have no initial cost, but would provide…

National Association of Securities Dealers Automated Quotations (NASDAQS). This study found that the BTMR was an effective variable in explicating the average CSSR. 1.1.3. Earning price ratio (EPR) and debt to equity ratio (DER) Factors In addition to the three factors previously discussed, however, others argued that the following two factors significantly affect the ERs: the earning price ratio (EPR) and the debt to equity ratio (DER). Basu (1977) indicated that the EPR impact should be…

and we invested in this portfolio. However, the stock started to decline and the fluctuations were in between $29 to $31 per share. In this regard, we were disappointed that this portfolio will not result as favorable. However, the prices of the stock increased and reached to 32.61 and we got benefit through this investment by $ 148.79. In addition to this, the stock performance that was beyond the expectation was of Federated Strategic Value Dividend A (SVAAX). T he day 1st February we made…

among the 20 stocks that remain in his portfolio. This entails maintaining a low correlation among the remaining stocks. For example, in part (a), with ρ = 0.2, the increase in portfolio risk was minimal. As a practical matter, this means that Hennessy would have to spread his portfolio among many industries; concentrating on just a few industries would result in higher correlations among the included stocks. 2. Risk reduction benefits from diversification are not a linear function of the number…

correlation between returns and of the portfolio and the market portfolio. An absolutely diversified portfolio will correlate accurately with completely diversified market portfolio since only has a systematic risk. Portfolio performance measures are the most important aspects of the investment process. Performance measures enable the availability of information necessary for investors to make a decision on how effectively the money has been invested or should be invested. Evaluation of…