Investment Analysis and Portfolio Management
weighted average of the Betas of its component securities, where the proportions
invested in the securities are the respective weights.
12. Security Market Line (SML) demonstrates the relationship between the expected return and Beta. Each security can be described by its specific security market line, they differ because their Betas are different and reflect different levels of market risk for these securities.
13. Arbitrage Pricing Theory (APT) states, that the expected rate of return of security is the linear function from the complex economic factors common to all securities. There could presumably be an infinitive number of factors. The examples of possible macroeconomic factors which could be included in using APT model are GDP growth; an interest rate; an exchange rate; a defaul spread on corporate bonds, etc.
14. Market efficiency means that the price which investor is paying for financial asset (stock, bond, other security) fully reflects fair or true information about the intrinsic value of this specific asset or fairly describe the value of the company – the issuer of this security. The key term in the concept of the market efficiency is the information available for investors trading in the market.
15. There are 3 forms of market efficiency under efficient market hypothesis: weak form of efficiency; semi- strong form of efficiency; strong form of the efficiency.Under the weak form of efficiency stock prices are assumed to reflect any information that may be contained in the past history of the stock prices.Under the semi-strong form of efficiency all publicly available information is presumed to be reflected in stocks’ prices.The strong form of efficiency which asserts that stock prices fully reflect all information, including private or inside information, as well as that which is publicly available.
Key-terms • Arbitrage
• Arbitrage Pricing Theory • (APT)
• Coefficient Beta ()
• Capital Market Line (CML) • Capital Asset Pricing Model
• (CAPM)
• Efficient frontier
• Efficient set of portfolios
• Expected rate of return of the portfolio
• Feasible set
• Indifference curves
• Map of Indiference Curves
66
Investment Analysis and Portfolio Management
• Market efficiency
• Markowitz Portfolio Theory • Market Portfolio
• Nonsatiation • Portfolio Beta • Risk aversion
• Risk free rate of return • Risk of the portfolio
• Security Market Line (SML)
• Systematic risk
• Standard deviation of the
• portfolio
• Semi- strong form of market • efficiency
• Strong form of market • efficiency
• Total risk
• Unsystematic (specific) risk • Weak form of market
efficiency
Questions and problems
1. Explain why most investors prefer to hold a diversified portfolio of securities as opposed to placing all of their wealth in a single asset.
2. In terms of the Markowitz portfolio model, explain, how an investor identify his / her optimal portfolio. What specific information does an investor need to identify optimal portfolio?
3. How many portfolios are on an efficient frontier? How is an investor’s risk aversion indicated in an indiference curve?
4. Describe the key assumptions underlying CAPM.
5. Many of underlyong assumptions of the CAPM are violated in some degree in “real world”. Does that fact invalidate model’s calculations? Explain.
6. If the risk-free rate of return is 6% and the return on the market portfolio is 10%, what is the expected return on an asset having a Beta of 1,4, according to the CAPM?
7. Under the CAPM, at what common point do the security market lines of individual stocks intersect?
8. Given the following information:
• Expected return for stock A = 18% • Expected return for stock B = 25%
• Standartd deviation of stock A = 12% • Standard deviation of stock B = 20% • Correlation coefficient = 1,0.
Choose the investment below that represents the minimum risk portfolio:
67
Investment Analysis and Portfolio Management
a) 100% invest in stock A;
b) 100% invest in stock B;
c) 50% in stock A and 50% in stock B;
d) 20% invest in stock A and 80% in stock B e) 60% invest in stock A and 40% in stock B.
9. The following investment portfolios are evaluated by investor:
Portfolio
A B C
Expected rate of return, %
12 10 10
Standard deviation
15 8 9
Using Markowitz portfolio theory explain the choise for investor between
portfolios A,B and C.
10. Investor owns the portfolio composed of three stocks.The Betas of these stocks and their proportions in portfolio are shown in the table. What is the Beta of the investor’s portfolio?
Stock Beta
A 0,8 B 1,2 C -0,9
Proportion in portfolio, % 30 40 30
11. How does the CAPM differs from the APT model?
12. Comment on the risk of the stocks presented below. Which of them are more /less risky and why?
Stock Beta A 0,92 B 2,20 C 0,97 D -1.12 E 1.18 F 0,51
13. What is meant by an efficient market? What are the benefits to the economy from
an efficient market?
14. If the efficient market hypothesis is true, what are the implications for the investors?
68
Investment Analysis and Portfolio Management
15. What are the conditions for an efficient market? Discuss if are they met in the
reality.
16. If stock’s prices are assumed to reflect any information that may be contained in the past history of the stock price itself, this is
a) Strong form of efficiency;
b) Semi-strong form of efficiency; c) Weak form of efficiency;
d) Not enough information to determine form of efficiency.
17. Investor ownes a portfolio of four securities. The characteristics of the securities and their proportions in the portfolio are presented in the table.
Security Coefficient Beta Proportion, % Expected rate of return, %
A 1,40 30 13
B 0,90 30 18
C 1,00 20 10
D -1,30 20 12
a) What is the expected rate of return of this portfolio? b) What is the risk of the portfolio?
c) If the investor wants to reduce risk in his portfolio how he could restructure his portfolio?
18. The following table presents the three-stock portfolio.
Stocks Portfolio Weight
Coefficient Beta
Expected return
Standard deviation
A 0,25 0,50 B 0,25 0,50 C 0,50 1,00
0,40 0,07 0,25 0,05 0,21 0,07
Variance of the market returns is 0,06.
a) What is the Beta coefficient of the portfolio?
b) What is the expected rate of return on the portfolio?
c) What is an actual variance of the portfolio, if the following actual covariance between the stock’s returns is given:
Cov (rA, rB) = 0,020 Cov (rA, rC) = 0,035 Cov (rB, rC) = 0,035
69
Investment Analysis and Portfolio Management
References and further readings
1. Fama, Eugene (1965). Random Walks in Stock Prices. // Financial Analysts Journal, September.
2. Fama, Eugene (1970).Efficient Capital Markets: A Review of Theory and Empirical Work// Journal of Business.
3. Haugen, Robert A. (2010). The New Finance. 4th ed. Prentice Hall.
4. Haugen, Robert A. (2001). Modern Investment Theory. 5th ed. Prentice Hall.
5. Jones, Charles P.(2010).Investments Principles and Concepts. JohnWiley & Sons, Inc.
6. Markowitz, Harry. (1952). Portfolio Selection. // Journal of Finance,7(1), p. 77-91. 7. Sharpe, William F. (1964). Capital Assets Prices: A Theory of Market Equilibrium
under Conditions of Risk // Journal of Finance, 19 (3), p. 425-442.
8. Sharpe, William F., Gordon J.Alexander, Jeffery V.Bailey. (1999). Investments. International edition. Prentice –Hall International.
9. Strong, Robert A. (1993). Portfolio Construction, Management and Protection.
70
...
- tailieumienphi.vn

nguon tai.lieu . vn