Modern portfolio theory

maximize the portfolio 's expected return, subject to an acceptable level of risk (or minimize risk, subject to an acceptable expected return). The assumption of a single time period, coupled with assumptions about the investor 's attitude toward risk, allows risk to be measured by the variance (or standard deviation) of the portfolio 's return. Thus, as indicated by the arrow in Figure 1, the investor is trying to go as far northwest as possible. As securities are added to a portfolio, the…

What does risk and return mean to the average investor? In order to answer this question, investors must first look to themselves to determine the correct steps to take. One cannot call him or herself an investor without first measuring their risk tolerance as well as risk capacity. Risk tolerance represents how much a client is willing to withstand swings in the value of held assets as well as changes in general market conditions. One of the most common ways of measuring one’s risk tolerance is…

The newsvendor problem is a mathematical model which is used to determine the optimal stock under uncertainty. In the following, the newsvendor context under cost minimization will be introduced. Let h be the unit holding cost respectively the unit overage cost (as we regard the pure cost context) and b the unit penalty of not serving demand (or unit backorder cost) respectively the unit underage cost. Then, the target inventory B is equal to the mean demand µ plus safety stock SS. The safety…

Introduction J&PInvestments is a newly formed portfolio management company. Our company held and managed a $1,000,000 portfolio, conducting 19 trades from September 27th, 2016 to November 15th, 2016. At the end of the trading period, the total return on our portfolio was 0.01%, our holdings as of November 15th, 2016 can be viewed in Appendix A. The purpose of this exercise was to observe how stocks move. We have included justifications for the stocks we chose, an analysis of the portfolio’s…

Univariate Binomial Tree Cox, Ross and Rubinstein (1979) developed the binomial option pricing model which converges to the Black-Scholes formula in the continuous limit and demonstrates the advantage in valuing American-style options. The model approximates the behavior of an asset price by the upward and downward changes in the asset price over a particular interval of time. As shown in Figure 1, an asset with a current price of S follows a multiplicative binomial process in which the…

visible impact on Bharat stock market in short run. Impulse response also proves this result. Bharat stock market was not found integrated in long run with other selected markets and short run relationship is also not confirmed by all the models. So portfolio diversification benefits are available for international investors in different selected stock markets under the study in long run as well as in short…

rate of return for the portfolio efficiency. Efficient portfolio depends on the risk free rate of return and risk level for the specific portfolio. It is tangent line draw from the intercept point on the capable point to the point where both risk free rate of return and expected rate of returns becomes equal. Market portfolio and risk free asset coalitions consequences form the capital market line. port All points on the CML have superior risk-return profiles to any portfolio on the economical…

a. If Sports Experts expands into Thailand, do you think its cost of capital will be greater or lower than its cost of capital when operating solely in the US? Explain your answer. Sports Experts’ cost of capital will probably be greater than the cost of capital of sport shoes manufacturers operating in the U.S. because of Sports Experts’ expansion into Thailand. Typically, an MNC has access to international capital markets, and international diversification are advantageous to an MNC’s cost…

QUESTION 1: VALUATION OF SHARES 1. ROE= 25% Dividends Paid = DPS/EPS (54000/50000)/4.32 1.08/4.32 0.25 25% Share price for Ragan is $27.36 2. Growth for 5years = 18.75% Growth after 5 years = 15% Dividends D(0)=1.08 D(1)=1.08 X 1.1875=1.2825 D(2)=1.2825 X 1.1875=1.52296 D(3)=1.52296 X 1.1875=1.8085 D(4)=1.8085 X 1.1875=2.1476 D(5)=2.1476 X 1.1875=2.5503 D(6)=2.5503 X 1.15=2.9328 Terminal Value = 2.9328/0.15 X 0.20 = $41.4 Share Price = D1/(1+r) + D2(1+r)^2 +D3(1+r)^3 +…

The three variance equation parameters such as ω, α, and β of GARCH-M model with different error distributions for all subset data were significant at 1% level with correct signs which provide evidence in favor of ARCH and GARCH effect. The significant value of ARCH term (α) implies that past stock price innovation influence on current volatility whereas significant GARCH parameter (β) suggest that current volatility of stock price is influenced by past volatility. For asymmetric models…