The gain achieved from one asset can offset the loss incurred from the other only if both the assets are negatively correlated. In this project the basic principles of the portfolio theory or the portfolio management theory has been discussed along with the theoretical aspect of the portfolio management theory. The investment viability criteria have also been discussed along with the other basic conditions like risk and return which should be considered before making any investment. The need of diversification of the portfolio has also been discussed along with all the risks associated with the diversified portfolios. Principles of portfolio As per Lonestreth Bevis portfolio can be described as a mixture of investment which is held or will be held by the investor. This means a portfolio is a collection or a group of two or more assets or securities held by the investor to gain maximum return while setting off the risk associated with one stock with the return of the other. The investment portfolio is guided by a number of principles. The decision regarding the portfolio will comprise of the decisions regarding the securities held in that portfolio. If the investor is expecting more return then he have to bear more risk too. This means that high return comes with higher risk. The risk of the variability of a particular asset held in the portfolio depends on when the investor will liquidate or sell it. Diversifying the investment will lessen the risk associated with the portfolio. Therefore diversification will help to reduce of the variability of the return associated with the portfolio. The portfolio should be formed as per the need and the risk tolerance level of the investor (Periasamy, 2009, p.7.10). One of the important principles regarding the portfolio is efficient allocation of assets in the portfolio. Moist of the performance of the portfolio depends upon the correct allocation of securities in the portfolio. The securities which are to be included in the portfolio the portfolio should be properly analysed in term of the expected return and risk associated with them and should be allocated in the portfolio according to the most appropriate weightage in order to achieve desired return from the portfolio. This could be done by analysing the historical prices and the performance of the portfolio (Ambrose wealth management, No Date, p.10). Theoretical background of portfolio management theory The portfolio management deals with the formation and performance of the portfolio. Theoretically the portfolio can be managed in five basic steps. The first step of managing the portfolio is to analyse the securities which are available for investment. This step includes accessing the various securities available to the investors. The securities which are available are analysed on the basis of the risk and return of those securities. The securities can range from the stocks to fixed deposits to risk free assts like treasury bills. The second step is to form different portfolios and analysing them. This is done by analysing
Portfolio Theory's underpinning principles need to be uncovered before appreciating the creation of capital asset pricing model (CAPM), Evaluate the reason why investors should establish portfolios. Contents Contents 2 Introduction 3 Principles of portfolio 3 Theoretical background of portfolio management theory 4 Net present value method 5 Evaluation of risk with large portfolio 6 Systematic risk 7 Market return on systematic risk 8 Measurement of systematic risk 8 Conclusion 9 Reference 9 Introduction Portfolio can be described as the group of assets or pool of securities in which money is invested…
This paper will outline how this method of valuing an asset fits to be a factor pricing model. This will entail discussing the assumptions relating to the form of stochastic discount model as well as how the factor method is related to the acquiring of equilibrium risk premium.
Payback rule is a good technique to evaluate an investment as it takes into account the period in which total investment is recovered. Payback rule gives us the time period in which the investment done in the capital is reimbursed by the cash flows generated by the investment.
The CAPM model therefore relies on the ability to measure market volatility as a whole. With several possible investments available in the market, the model assumes that one can accurately assess the volatility of each of these investments. This is impossible.
Whilst some of these data may be due to data-snooping from the analytical work of armchair researchers attempting to discern some meaning to what could just be a simple collection of facts, much of the empirical data such as beta, stock volatility, co-variances, etc.
The idea of investing in the financial market is to purchase the asset while the price is low, and to sell when the price appreciates.
The seeming arbitrary movement of prices of assets, such as stocks, has
stment in one asset or security and should diversify the investment by investing in a group of assets so that the loss from one security can be compensated by the gain of the other security. The gain achieved from one asset can offset the loss incurred from the other only if
The risk free rate is the government bond ideally, that has a fix ten years. The Beta is the true measure of the risk that is in the stock that one has invested on.
With the risk in it, measure the volatility of the investment. It is in this
To start with, we will understand the concept of an efficient portfolio as described below.
Most investors, according to mean-variance analysis and asset pricing model, tend to invest in a more efficient portfolio
6 pages (1500 words)Assignment
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