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The Legacy of Modern Portfolio Theory - Academic Essay Assignment - Www.topgradepapers

The Legacy of Modern Portfolio Theory - Academic Essay Assignment - Www.topgradepapers

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The word “Portfolio” can be defined as; the totality of decisions determining an individual’sfuture prospects” (Sharpe, 1970). Portfolio can consist of many types of assets such as plant,
property, real and financial assets (P.A Bowen, 1984). Portfolio theories propose how rationaland prudent investors should use their due diligence to diversify their investments to optimizetheir portfolios, and how a risky asset should be priced as compared to less risky asset. Peoplehave been investing in the different assets class since decades but then they realize theimportance of risk and its negative implications, if not treated effectively. Every investor has his
own tolerance of risk and investor’s defines it in his ability of taking it. The portfo
lio theorieshave been derived over time in order to effectively measure the risk and how it can be reducedby diversify in their asset.
 Article 1: “
The Legacy of Modern
Portfolio Theory”
This article covers the highlights of modern portfolio theory, describing how risk and its effectsare measured and how planning and asset allocation can help you do something about it. Modernportfolio theory is the theoretical conflicting of conventional stock picking. It is being putforward by the economists, who try to understand the phenomena of the market as a whole,instead of business analysts, who look for individual investment opportunities. Investments areexplained statistically, as how much investor expected long-term return rate and their expectedshort-term volatility. It measures how much expected return can deviate much worse thanaverage an investment's bad years are likely to be. The goal of the theory is to identify youradequate level of risk tolerance, and then to come up with a portfolio with the maximumexpected return for that level of standard deviation (risk).The portfolio it assumes that the investment universe consists only of two market securities, therisk free asset and risky assets. But the actual investment universe is much broader than thatbeing put forward. The optimal level of investment is to invest on efficient frontier but doing thiswould mean to calculate the millions of covariance among the securities. This calculation couldmake the life of analyst as difficult as one could ha
ve ever imagined. To think practically, it’s
better to put portfolio theory to work means investing in a limited number of index securitiesrather than a huge number of individual stocks and bonds. Index investing is the point the whereportfolio theory starts to rely on the efficient market hypothesis. When you buy an index basedportfolio strategy you're allocating your money the same way the whole market is - which is ahigh-quality thing if you believe the market has a plan and it is efficient. This is why portfoliotheory is one of the branches of economics rather than finance: instead of only studying financialstatements and different financial ratios, you study the aggregate behavior of investors, some of whom seemingly
studied financial statements so that market valuations will reflect theirdue diligence and prudence.
 Article 2: “
Theory of portfolio and risk based on incremental entropy
The article has used incremental entropy to optimize the portfolios. This novel portfolio theoryhas been based on incremental entropy that carries on some facet
of Markowitz’s (1959, 1991)
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theory, but it highlights that the incremental speed of capital is a more objective criterion forassessing portfolios. The performance of the portfolio just cannot be justified with the returnsbecause we have to keep in mind the risk of achieving those returns. Given the probabilityforecasts of returns, we can obtain the best possible investment ratio. Combining the newportfolio theory and the general theory of information, we can approach a meaning-explicitmeasure, which represents the increment of capital-increasing speed after information isprovided. The article has used example to make it more clear that as we try to become richwithin days there involve high risk of even losing those money which we at-least own at present.The ineffective investment is like a coin toss either you have all the money in your pocket or youend having nothing in your pocket. The same being very risk averse would not help you becomerich. You there has to be a balance in selecting the portfolio and this article explain the optimalinvestment ratio. (pg 1)Markowitz explains us that an efficient portfolio is either a portfolio that offers the maximumexpected return for a given level of risk, or one with the minimum level of risk for a givenexpected return. There is no objective criterion to define the maximum effectiveness of aportfolio given the expected return and risk level and different expects have different view aboutit. The Mark 
efficient portfolio tells us about the indifference curve of the investor andabout the market portfolio. It is not the portfolio which we need for the fastest increment of capital. So, this article has derived a new mathematical model.The model explains that when gain and loss are have equal chance of occurring, if the loss is upto 100 percent, one should not risk more than 50 percent of fund no matter how lofty the possiblegain might be. This conclusion has a great importance and significant for risky investments, suchas futures, options, etc. Most of the new investors of future markets lose all of their money veryfast because the investment ratios are not well controlled and generally too large. we can obtainthe optimal ratios of investments in different securities or assets when probability forecasts of returns are given.
Comparison with Markowitz’s theory 
The new theory supports Markowitz’s conclusions that investment risk can be reduced
byeffective portfolio, but there are some obvious differences: The new theory uses geometric meanreturn as the objective criterion for optimizing portfolio and gives some formulas for optimizinginvestment ratios; and . The new theory makes use of extent and possibility of gain and lossrather than expectation of return and standard deviation (risk) of the return to explain investmentvalue.
 Article 3: “On the competitive theory and practice of portfolio selection”
To select an optimal level of portfolio has always been a basic and fundamental problem in thefield of computation finance. There are lots of securities are available including the cash and thebasic online problem is to agree on a portfolio for the i
trading period based on the series of price for the scheduled i-1 trading period. There has been increasing interest but also mountinguncertainty relating to the value of competitive theory of online portfolio selection algorithms.
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Competitive analysis is based on the worst and most unexpected case scenarios and viewpoint;such a point of view is conflicting with the most widely used analysis and theories being adoptedby the investors based on the statistical models and assumptions. Surprisingly in some of theinitial experiments result shows that some algorithms which have enjoyed a highly regardedrepute seems to outperform the historical sequence of data when seen in relation to competitiveworst case scenarios. The emerging competitive theory and the algorithms are directly related tothe studies in information theory and computational learning theory, in fact some of thealgorithms have been the broken new ground and set new standards within the information andcomputational theory learning based communities. The one of the primary goal and objective of this paper is understand the extent to which competitive portfolio algorithms are in realitylearning and are they really contributing to the welfare of the investor. In order to find out sothey have used set of different strategies this can be adapted to data sequence. This is beingpresented in a mixture of both strong theoretical and experimental results. It has also beencompared with the performance of existing and new algorithms and respects to standard series of the historical sequence data and it also present the experiments from other three data sequence. Itis being concluded that there is huge potential for selecting portfolio through algorithms that arebeing derived from competitive force and as well as derived from the statistical properties of data.
 Article 4: “
International property Portfolio Strategies
The article talks about the investment decisions regarding real estate, and try to put in theMarkowitz mean variance formula to analyze the real estate market. They are not confined onlyto local real estate diversification but they are also including international diversification.Markowitz mean variance continuum and graph is useful in analyzing the efficient securities, andthey help in the selection of an optimal portfolio on envelope curve taking into account the risk preferences of an investor. But when analysts try to incorporate real estate market to theMarkowitz theory the major problems regarding liquidity, heterogeneity, indivisibility andinformation are faced by them which restrict them from further optimal analysis.Many investors have tried to support the theory to make a portfolio by considering property asasset like equity and bond investments; although there are a lot of differences among thecharacteristics of assets discussed above, but one can diversify its portfolio by investing in realassets, analysts argue. The discussion was dominated by the concept of internationaldiversification of assets including real estate. To support the analysis in UK the (Sweeney ,1988-1989) work in cited most of the times, he came up with the famous model of real estate tocome up with efficient diversification strategy, he used rental value of for different countries andcame up with the model of risk return theory; after that a lot of analysts including: [Baum andSchofield (1991), Brühl and Lizieri (1994), Gordon (1991), Hartzell et al. (1993), Johnson(1993), Sweeney (1993), Vo(1993) and Wurtzebach (1990)], have come up with analysis tosupport international diversification; but the result was somehow was not justifying theinculcation of real estate to portfolio theory, because those assets were not correlated at all wheninspected for the risk return behavior during last decade or so. This can be attributed to thefailure of mean variance model to produce results, the main problems facing would be regardingdata collection, technicalities, omitted categories, and ex post analysis.
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