“Critically discuss whether the CAPM makes portfolio theory redundant.” Introduction This assignment will explore whether CAPM makes portfolio theory redundant. The following areas will be discussed; Stages involved‚ functions and roles‚ important components‚ formula of cap-M‚ positive and negative aspects of Cap-M‚ all while drawing to the conclusion to whether Cap-M makes portfolio theory redundant. (ref:2) Definition CAPM is defined as Capital asset pricing model. It is an economic theory
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8. Which one of the following best describes a portfolio? A. Risky security B. Security equally as risky as the overall market C. New issue of stock D. Group of assets held by an investor E. Investment in a risk-free security 15. Which one of the following is the slope of the security market line? A. Risk-free rate B. Market risk premium C. Beta coefficient D. Risk premium on an individual asset E. Market rate of return 21. Standard deviation measures _____ risk while beta measures _____ risk.
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What is the beta of a portfolio with E[rp ] = 18 percent‚ if rf = 6 percent and E[rM ] = 14 percent? Answer: Using the CAPM equilibrium condition‚ E[rp ] = rf + βp E[rM ] − rf ⇒ βp = E[rp ] − rf .18 − .06 = 1.5 . = E[rM ] − rf .14 − .06 2. The market price of a security is $50. Its expected return is 14 percent. The risk-free rate is 6 percent and the market risk premium is 8.5 percent. What will be the market price of the security if its covariance with the market portfolio doubles (and all other
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inflation averaged 3.5% over the year‚ then the realized real return would only be 5.5% – 3.5% = 2%‚ not the expected 3%. To simplify matters‚ in terms of purchasing power‚ T-bills are not riskless. Investors are fully aware of the changes within a portfolio of T-bills‚ and as rates declined‚ the nominal income will fall; and T-bills are exposed to reinvestment rate risk. In summary‚ it is concluded that there are no truly risk-free securities within the United States. If the Treasury sold inflation-indexed
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is planning to buy some financial products such as equities‚ bonds and currencies. She has asked me for some guidance. In my opinion‚ I think diversifying portfolio would be the best way to get a higher return. In this essay‚ I will explain the concept and benefits of diversification in financial markets. However‚ even with a diversified portfolio of investments‚ she still could suffer losses from a future financial crisis. Hence‚ I am going to explain the reasons for the losses in the essay as well
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estimates‚ the securities where grouped into portfolios. The findings of this article are not supportive of the theory’s basic statement that higher risk (beta) is associated with higher levels of return. The model does explain‚ however‚ excess returns and thus lends support to the linear structure of the CAPM equation. The CAPM’s prediction for the intercept is that it should equal zero and the slope should equal the excess returns on the market portfolio. The results of the study refute the above
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Efficient frontier construction Step 1. Variance/covariance matrix‚ σρσ The expected return and variance for the portfolio are: You can think of the variance as the “weighted average” of all the covariances‚ σiσjρij where the weights are xi and xj. Of course‚ the variance terms are special cases of the covariances when i=j‚ and ρij=1. You can calculate the portfolio variance in the spreadsheet in many different ways. The way I do it is to first calculate the variance/covariance matrix
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concepts first : The mean variance framework‚ determines the optimal allocation to different asset classes that minimizes portfolio return variance. This is done by plotting allocations to the various asset classes across two axes representing risk and return. When the CAPM assumptions hold‚ an optimal portfolio is a combination of the risk-free investment and the market portfolio. This line is obtained by plotting a point representing the riskfree return on the y-axis and drawing a tangent to the efficiency
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Stock Case: Dow 30 Case How do you create a diversified stock portfolio? Introduction Our goal was to create an optimal diversified portfolio consisting of the Dow Jones Index. We used the modern portfolio theory which maximizes expected portfolio return for the amount of risk taken by taking the stock weights in to consideration. Our group consisted of risk averse investors; therefore we diversified our portfolio with all 30 Dow Jones stocks because we wanted to achieve an acceptable return
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FINANCE 301 DR. SHELDON NOVACK CASE STUDY ROTH FINANCIAL ADVISORS PART #1 INTRODUCTION Roth Financial‚ founded nearly 10 years ago‚ is a financial services firm which has a diverse base of clients. The founder of this start-up firm‚ Hugo Roth‚ developed a reputation for himself and also his associates by the way the financial firm conducts business. As the firm grew‚ so did the firm’s reputation for honesty and fair dealing. Hugo Roth established a reputation for training and helping
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