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www.nber.org
www.nber.org

R i
R i

... • Single-period investment horizon • Investors can invest in the universal set of publicly traded financial assets • Investors can borrow or lend at the risk-free rate unlimitedly • No taxes and transaction costs • Information is costless and available to all investors • Assumptions associated with ...
Capital Marketing
Capital Marketing

... borrower could be a corporation, a large project, or a sovereignty (such as a government). The loan may involve fixed amounts, a credit line, or a combination of the two.  Structured Finance: Structured finance is a broad term used to describe a sector of finance that was created to help transfer r ...
Document
Document

... variance, we find the squared deviations from the expected return. We then multiply each possible squared deviation by its probability, and then sum. The result is the variance. So, the variance and standard deviation of each stock is: A2 =.15(.01 – .0930)2 + .55(.09 – .0930)2 + .30(.14 – .0930)2  ...
Course Outline - Department of Statistics, CUHK
Course Outline - Department of Statistics, CUHK

... Chapter 3: Introduction to Risk and Return 1. Introduction 2. Measures of investment return and risk (1) Measurement of single-period return (2) Expected returns and measure of risk 3. Return and risk of combining investments (1) Portfolio with two securities (2) Implications of very large portfolio ...
No Slide Title
No Slide Title

... regression is not expected if all assets are in equilibrium • in words, the risk premium earned on the jth portfolio is equal to bj times a market risk premium plus a random error term ...
Risk Measures Guide - The Albridge Resource Center
Risk Measures Guide - The Albridge Resource Center

... because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe Ratio, the better its risk-adjusted performance has been. A negative Sharpe Ratio indicates ...
BM410-08 Theory 1 - Risk and Return 20Sep05
BM410-08 Theory 1 - Risk and Return 20Sep05

...  Investment risk. The probability of not achieving some specific return objective  Risk-free rate  The rate of return that can be obtained with certainty  Risk premium  The difference between the expected holding period return and the risk-free rate  Risk aversion  The reluctance to accept ri ...
chap013
chap013

PowerPoint-Präsentation
PowerPoint-Präsentation

... Much harder to create value through financial activities Changes in asset price respond only to new information. This implies that asset prices move almost randomly. Berlin, 04.01.2006 ...
Return, Risk, and the Security Market Line
Return, Risk, and the Security Market Line

...  For example, if you own 50 Internet stocks, you are not diversified  However, if you own 50 stocks that span 20 different industries, then you are diversified ...
SECOND MIDTERM
SECOND MIDTERM

An alternative school of thought
An alternative school of thought

Document
Document

... CRITICISM OF RISKADJUSTED PERFORMANCE MEASURES • Use of a market surrogate • Roll: criticized any measure that attempted to model the market portfolio with a surrogate such as the S&P500 – it is almost impossible to form a portfolio whose returns replicate those over time – making slight changes in ...
Answer: The expected return of an asset is the sum of the probability
Answer: The expected return of an asset is the sum of the probability

... 13. Using CAPM. A stock has a beta of 1.23, the expected return on the market is 10.9 percent, and the risk-free rate is 3.6 percent. What must the expected return on this stock be? Answer: The CAPM states the relationship between the risk of an asset and its expected return. The CAPM is: E(Ri) = Rf ...
Risk and Return
Risk and Return

...  The reward-to-risk ratio is the expected return per "unit" of systematic risk, or, in other words, the ratio of the risk premium and the amount of systematic risk.  Since systematic risk is all that matters in determining expected return, the reward-to-risk ratio must be the same for all assets a ...
Gold`s Role in a Diversified Portfolio
Gold`s Role in a Diversified Portfolio

... Gold’s role in a diversified portfolio Portfolio diversification refers to reducing investment risk by purchasing a variety of different assets. Even though an individual asset or asset class may outperform another in a given timeframe, a portfolio containing multiple assets may deliver higher risk- ...
the great risk/return inversion - who loses out?
the great risk/return inversion - who loses out?

... traces in detail how benchmarking pressures distort prices. A positive earnings shock for a security or sector causes prices to rise to a new and higher valuation level. Managers who were underweight to start with now find their mismatch has increased and need to make additional purchases to satisfy ...
Introducing RBC Dominion Securities
Introducing RBC Dominion Securities

... The importance of asset allocation  The asset allocation between equities, fixed income and cash is the main factor determining your portfolio’s risk/ return tradeoff.  Everyone has an optimum asset allocation range based on factors such as their stage in life and their personal comfort level wit ...
Ch13
Ch13

... • How do you compute the expected return and standard deviation for an individual asset? For a portfolio? • What is the difference between systematic and unsystematic risk? • What type of risk is relevant for determining the expected return? • Consider an asset with a beta of 1.2, a risk-free rate o ...
Asset Allocation and Diversification
Asset Allocation and Diversification

... by a lack of diversification. When you look at instances where investors have suffered catastrophic and permanent capital loss, perhaps two-thirds or more of their life savings, a lack of diversification is almost always a contributing ...
Chapter 13
Chapter 13

Lecture 16
Lecture 16

... than in equally weighted portfolios. In crisis, equal weighted portfolios tend to have higher returns than value weighted portfolios. When value and momentum perform poorly, equal weighted portfolios tend to do poorly as well. A portfolio weight vector is an input to the mean-variance optimization. ...
A Successful Fund Manager Discusses His Techniques
A Successful Fund Manager Discusses His Techniques

... Investment style - Value. Strategy was long only with a long term investment horizon? Primary screening tool - P/E – Price divided by trailing operating earnings (Back test suggest that over the long term low P/E stocks out perform high P/E stocks Portfolio held 80 to100 stocks Rebalance monthly – a ...
presentation - University of Connecticut
presentation - University of Connecticut

... UNIVERSITY OF CONNECTICUT Student Managed Fund December 3rd, 2004 ...
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Modern portfolio theory

Modern portfolio theory (MPT) is a theory of finance that attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets. Although MPT is widely used in practice in the financial industry and several of its creators won a Nobel memorial prize for the theory, in recent years the basic assumptions of MPT have been widely challenged by fields such as behavioral economics.MPT is a mathematical formulation of the concept of diversification in investing, with the aim of selecting a collection of investment assets that has lower overall risk than any other combination of assets with the same expected return. This is possible, intuitively speaking, because different types of assets sometimes change in value in opposite directions. For example, to the extent prices in the stock market move differently from prices in the bond market, a combination of both types of assets can in theory generate lower overall risk than either individually. Diversification can lower risk even if assets' returns are positively correlated.More technically, MPT models an asset's return as a normally or elliptically distributed random variable, defines risk as the standard deviation of return, and models a portfolio as a weighted combination of assets, so that the return of a portfolio is the weighted combination of the assets' returns. By combining different assets whose returns are not perfectly positively correlated, MPT seeks to reduce the total variance of the portfolio return. MPT also assumes that investors are rational and markets are efficient.MPT was developed in the 1950s through the early 1970s and was considered an important advance in the mathematical modeling of finance. Since then, some theoretical and practical criticisms have been leveled against it. These include evidence that financial returns do not follow a normal distribution or indeed any symmetric distribution, and that correlations between asset classes are not fixed but can vary depending on external events (especially in crises). Further, there remains evidence that investors are not rational and markets may not be efficient. Finally, the low volatility anomaly conflicts with CAPM's trade-off assumption of higher risk for higher return. It states that a portfolio consisting of low volatility equities (like blue chip stocks) reaps higher risk-adjusted returns than a portfolio with high volatility equities (like illiquid penny stocks). A study conducted by Myron Scholes, Michael Jensen, and Fischer Black in 1972 suggests that the relationship between return and beta might be flat or even negatively correlated.
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