Competency Test 2

Dr. Firman Pribadi,Msi

NAME: NUR EKA AYU DANA
CLASS: IPACC 18
SID: 20180420159

1. What do you know about Single Index Model, CAPM and APT and the relation beteween the
theories.

Answer:

The single index model arises when investors are unable or difficult to implement a multi-
stock portfolio model. The basis of a single index is that the price of a security fluctuates in the
direction of the market index. Securities returns are correlated because there is a general
reaction to changes in market value. There are factors that affect all returns on the market
index. The advantage are Reduces the number of inputs for diversification and Easier for security
analysts to specialize.

CAPM describes the relationship between risk & return of the stocks that make up an
investment portfolio is used to determine the price of risky securities, perform non-systematic
risk calculations in a portfolio and compare it with expected return predictions, CAPM only takes
into account one risk factor, namely beta. commonly used by appraisers. CAPM is developed
from investment portfolio theory.

APT arises if investors can build a zero investment portfolio with definite returns. Since no
investment is required, investors can make large positions to secure large returns In efficient
markets, profitable arbitrage opportunities are quickly lost. The bottom line is that only a small
number of systematic influences affect the long-run average stock return. Predicting the
relationship between the rate of return of a portfolio and the return of a single asset through a
linear combination of many independent macroeconomic variables. take into account multiple
risk factors. APT applies to well diversified portfolios and not necessarily to individual stocks. APT
is more general in that it gets to an expected return and beta relationship without the
assumption of the market portfolio. APT can be extended to multifactor models.

2. What are some comparative advantages of investing in the following:

a. Unit investment trusts.
b. Open-end mutual funds.
 c. Individual stocks and bonds that you choose for yourself

Answer:

a. Unit investment trusts: Diversification from large-scale investing, lower transaction

costs associated with large-scale trading, low management fees, predictable
portfolio composition, guaranteed low portfolio turnover rate.
b. Open-end mutual funds: Diversification from large-scale investing, lower transaction
costs associated with large-scale trading, professional management that may be able
to take advantage of buy or sell opportunities as they arise, record keeping, open to
the public and can be traded by ordinary people and can be sold back to the
investment manager.
c. Individual stocks and bonds: No management fee; ability to coordinate realization of
capital gains or losses with investors' personal tax situations; capability of designing
a portfolio to an investor's specific risk and return profile.

3. What do you know about insider trading and the Efficient Market Hypothesis
(EMH)?, and explain the relation to them!
Answer:
Insider trading is a fraudulent practice that occurs in the capital market. This is usually
done by utilizing internal information, for example company plans or decisions that have not
been published. EMH is a condition where the market has been efficient. In an efficient state,
the stock price already describes the information stories. Hence traders find it difficult to get
more profit. Because when the market is efficient traders do not get more profit, sometimes
insider trades appear that spread internal company information, causing stock prices to rise or
fall. The information from insider trading can make market conditions inefficient so that
some parties may get more profit.
4. Please explain your understanding related to systematic and nonsystematic risk! How
is the relation of both the risk and the portfolio? Please briefly describe, and it would
be a plus if you give a graph, for example. 
Answer:
 This is a graph of investment risk. Unsystematic risk is represented by areas in light
blue. Systematic risk is described in dark blue. The total risk in the image above is depicted
by the light blue and dark blue areas.
Systematic risk is referred to as market risk. Systematic risk is a risk that is difficult to
avoid. Examples of systematic risk are an increase in interest rates, an inflation and high
market volatility (market risk).
Non systematic risk is often referred to as specific risk, or company risk. Generally,
non-systematic risk can be managed using a portfolio. The example of an investment
portfolio is a mutual fund. Mutual funds generally consist of several types of stocks, bonds or
other financial products. Examples of non-systematic risk are: liquidity risk, bankruptcy risk
and legal prosecution risk.