Attribution Non-Commercial (BY-NC)

17 views

Attribution Non-Commercial (BY-NC)

- Bowers Solutions
- Unlisted Infrastructure - Proven Performer
- Study of financial products through IFA channel
- Financial Management in Construction
- JEEVAN SURABHI_106_107_108
- portfolio optimization analyticderivative
- Project on Portfolio Management
- Risk and Return
- Issues for Investment Fund Managers
- BEHAVIOURAL FINANCE
- Corporate Finance Assignment 3
- 16 Bibliography
- Investment
- Equity Guide
- SM CHAPT 6
- 359602444
- Research Papers for Review-18M183
- Relationship Between Mutual Fund Type Portfolio Turnover Longev
- bm005m_SEKAMANYAMichael_cw
- Jalan_Tol_Pekanbaru_Dumai_Ari_1.doc

You are on page 1of 43

Lecture 1

Portfolio Perspective

What is a Portfolio? Diversification Evaluate how individual securities contribute to risk/return

of a portfolio?

Markowitz framework: Standard deviation as a measure

of risk

Types of Clients

Individual Investors

Characteristics

Institutional Investors

Banks Insurance Companies Investment companies Others

Asset Classes

Equities Fixed Income / Bonds Commodities Real Estate

Planning Analyse investors objectives and constraints Create Investor Policy Statement (IPS) Execution Asset Allocation Security Analysis and Selection Portfolio Construction Feedback Monitoring and rebalancing Measurement and reporting (Evaluation)

Pooled Investments

Mutual Funds Open-ended / Closed Ended Types of Fund (Stock, Bond, Index Fund) Active/Passive

Hedge Funds Absolute returns, high leverage, large investors Strategies: shorting, derivatives

Private Equity Funds Buy-out funds, Venture capital funds

Expected Returns - E(R) Risk Standard Deviation -

Example

Stock A

Stock B

Portfolio

Return

E(RA) A

E(RB) B

E(RP) P

Risk

Excel Example

State of Economy 1 2 3 4 5 Probability 20% 20% 20% 20% 20% Return on Stock A 15% -5% 5% 35% 25% Return on Stock B -5% 15% 25% 5% 35% Return on Portfolio 5% 5% 15% 20% 30%

Expected Returns

15.00%

15.00%

15.00%

Variance

Standard Deviation

0.0200

14.14%

0.0200

14.14%

0.0090

9.49%

Total Risk = Systematic Risk + Unsystematic Risk Market Risk Unique Risk

=

=1

( )

= +

Expected Return

16.80%

Covariance reflects the degree to which two securities

( , )

( , ) ( , ) =

Correlation

Value between -1 and 1

Portfolio Risk

Standard deviation of portfolio

Portfolio Risk

Example

Weight Expected Return Standard Deviation 0.6 20% 40% 0.4 12% 16%

Stock A Stock B

Correlation

-1

16.80% 17.60%

Expected Returns:

Variance:

Matrix Multiplication

Portfolio weights are w' = (.3, .4, .3)

Variance-covariance matrix:

Efficient Frontier

A portfolio of two securities

Security A Security B Expected Returns Standard Deviation Correlation 12% 20% -0.2 A B Expected Standard Proportion Proportion Return Deviation 1 1 0 12.00% 20.00% 2 0.9 0.1 12.80% 17.64% 3 0.76 0.24 13.92% 16.27% 4 0.5 0.5 16.00% 20.49% 5 0.25 0.75 18.00% 29.41% 6 0 1 20.00% 40.00% 20% 40%

Portfolio

Efficient Frontier

25.00%

20.00%

15.00%

10.00%

5.00%

0.00% 0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

Efficient Frontier

Benefit of diversification

Minimum Variance

Portfolio (Portfolio C) Feasible set or opportunity set represented by the curved line AB The curve bends backwards. Investors invest above MVP.

O r = -1

r=0

r=1

The efficient frontier represents the set of portfolios that will give the highest return at each level of risk or the lowest risk for each level of return.

Efficient Portfolio

A portfolio is efficient if there is no alternative with:

Higher expected return with same level of risk Same expected return with lower level of risk Higher expected return for lower level of risk

Adding a risk-free asset can change the efficient frontier as it has no risk/variance.

CAL

R E(Rm)

P Rf

= + =

Y = MX + C

( ) = +

CAL

R E(Rm)

P Rf

Risk Aversion

Risk aversion refers to the behaviour of investor to prefer

Risk averse investors:

Prefer lower to higher risk for a given level of expected return Accept high risk investment only if expected returns are greater

E(R)

Risk

E(R) IP IQ

Risk

E(R) IP IQ

Risk

U = E(R) A * Variance U is a given level of happiness A is the level of risk averseness

E(R) = A * Variance +U

Combine Indifference curve with CAL/Efficient Frontier

CML is a special case of CAL

Homogeneity of expectations

Market portfolio

CML

R E(Rm)

Rf

CML R E(Rm) M

Rf

R M

Beta

A measure of volatility of a portfolio or a security in

(, ) = () , = 2 , =

Market Beta = 1

Investors are risk-averse, utility maximizing and rational

Frictionless markets

Single holding period Homogenous expectations Investments are infinitely divisible Investors are price takers

CAPM Equation

= +

0.8 1 1.2

Question

The risk-free rate is 5%. The return on Sensex is 12%.

XYZ Corp. is 20% less volatile than the market. Calculate the required rate of return on XYZ Corp.

Question

The stock market is expected to generate 11% return. The

standard deviation of the market returns is 15%. ABC Corp. is 20% more volatile than the market. Risk-free rate is 4%. Calculate the expected return on XYZ Corp.

Single-factor Models

Multi-factor Models

- Bowers SolutionsUploaded byjcheung12
- Unlisted Infrastructure - Proven PerformerUploaded byjleungcm
- Study of financial products through IFA channelUploaded bypunit
- Financial Management in ConstructionUploaded bySoufiane Ouaadidy
- JEEVAN SURABHI_106_107_108Uploaded byVinay Kumar
- portfolio optimization analyticderivativeUploaded byendu wesen
- Project on Portfolio ManagementUploaded byAyesha Agrawal
- Risk and ReturnUploaded byVăn Dương
- Issues for Investment Fund ManagersUploaded byInterconti Ltd.
- BEHAVIOURAL FINANCEUploaded byAaina Kapur
- Corporate Finance Assignment 3Uploaded byHardeep Kaur
- 16 BibliographyUploaded byBinayKP
- InvestmentUploaded byPathadarshini Parija
- Equity GuideUploaded bysatyagolti
- SM CHAPT 6Uploaded bynajihah radzi
- 359602444Uploaded byaforall123
- Research Papers for Review-18M183Uploaded bysharan Chowdary
- Relationship Between Mutual Fund Type Portfolio Turnover LongevUploaded byGhulam Nabi
- bm005m_SEKAMANYAMichael_cwUploaded bymawandm
- Jalan_Tol_Pekanbaru_Dumai_Ari_1.docUploaded bydherymuammarnazri
- Contribution to Total Firm RiskUploaded byClaudine Duhapa
- How to Diversify Your Investment PortfolioUploaded byriti
- Certificate Tomblseon State EndorsedUploaded byL. A. Paterson
- MS-44-2010Uploaded bySeema4334
- JSTREET Volume 355Uploaded byJhaveritrade
- Michael Johnson - Why the Pension System is Broken, And How to Fix ItUploaded byonenationregister
- 1202afe - essayUploaded byapi-281494605
- Portfolio and Risk ManagementUploaded byDaniel Montenegro
- invUploaded bypavangold
- LB Sutton Statment of Invmt PrinciplesUploaded bykvisa

- Third Point Capital - Q1 2013 LetterUploaded byWall Street Wanderlust
- CFA Challenge Final VersionUploaded bySean Moore
- Course LibraryUploaded byAmresh Sinha
- TN3 Ben Jerrys HomemadeUploaded byHassan Mosa
- Fin Acc 3 - Chapter 33Uploaded byTong Wilson
- Banking on Good Advice_AccentureUploaded byManish Anand
- CAPIQ - Excel Plug-InTemplate GuideUploaded byCisco Sevilla
- Controle 2.0Uploaded byVinícius Schambeck
- pdp resumeUploaded byapi-349990269
- Annual ReportUploaded byshranky
- Dotcom Mania ; The Rise and Fall of Internet Stock PricesUploaded bysilviana isyanto
- Banking and Indian Financialt200813Uploaded byVenkatesh Pabbati
- ch3Uploaded byLakshman Rao
- CHARTING A COURSE THROUGH THE CDS BIG BANG-FITCHUploaded by83jjmack
- Economic vs. Accounting ProfitUploaded byushaikh_us
- Tek Tronic sUploaded byNil Mukherjee
- Articol a Survey and Analysis of Capital Budgeing Methods Used by MultinationalsUploaded byGeorgiana Georgi
- Fa4e Sm Ch11Uploaded bymichaelkwok1
- Whole Thesis 2 1Uploaded byJAYMILYN SANTOS
- Form_A2Uploaded byGurusamy Rajakannu
- Capital Budgeting is Vital in Marketing Decisions (1)Uploaded bypraveen188668
- Chapter12 GEUploaded byPC
- CFPB Loan EstimateUploaded byRichard Vetstein
- Islmaic Banking NotesUploaded bySaif Ahmed Khan
- Post Market Report 16th DecUploaded byDynamic Levels
- Markit iBoxx ABF GuideUploaded byAreeys Syaheera
- 50721825-Ratio-Analysis-1Uploaded by3188KD
- basel implementation issues.pdfUploaded byOsama Az
- Unit StatementUploaded byMrshiva2
- Victim Complaint Against Bernard L. MadoffUploaded byDealBook