Advanced corporate finance II: modern Portfolio theories

Résumé du document

Harry Markowitz is a Nobel Prize winning economist who worked on the modern portfolio theory. His work has changed the ways of investing for many traders, keeping in mind that his work gave scientific features to risk versus return. The modern portfolio theory is made of different tools to optimise investors portfolios and in which way risk has to be managed with return. The tools are numerous and we count the diversification, the efficient frontier, the capital asset pricing model or CAPM, the beta co-efficient among them etc. Regarding diversification, the capital asset pricing model, and the beta coefficient, are explained in their respective parts of the assignment. The efficient frontier was defined by Markowitz in 1952, and it gives a representation of how to get the optimum portfolio regarding the two variables, risk and return.

Extraits

[...] However, a higher potential rate of return could be expected. If the beta is under 1 but still positive, it means that the stock does not fluctuate so much regarding the market and consequently it means that the stock is less risky and that the expected return is more likely to become true. However this last would not be very high. The Beta could be negative and it has the meaning that the stock fluctuates in the reverse way than the market. [...]

[...] It means that we have to guess what rate of return the overall stock market would produce. The Capital Asset Pricing Model explains that the expected return of a stock that we could choose for the simulation of Stocktrack equals the rate on a risk free security plus a premium for the taken risk. If the return that we expected did not meet or be better than the required return, we would not choose the analysed stock. In fact, the Beta is the only variable that we changed in the formula, looking on the Internet which one would be suitable. [...]

[...] Advanced corporate finance II: modern Portfolio theories MARKOVITZ DIVERSIFICATION CAPITAL ASSET PRICING MODEL BETA COEFFICIENT RISK AND RETURN ACTIVE/PASSIVE INVESTING FUNDAMENTAL/TECHNICAL ANALYSIS REFERENCES Markovitz Harry Markowitz is a Nobel Prize winning economist who worked on the modern portfolio theory. His work has changed the way of investing of many traders, keeping in mind that his work gave scientific features to risk versus return. The modern portfolio theory is made of different tools to optimise investors' portfolios and in which way risk has to be managed with return. [...]

[...] The results were positive but not enough regarding what the rest of the class earned. That was at this moment that we considered that we had to change our strategy. We began to focus on investments that could help us earn the maximum of return on investment to catch up the rest of the class. The second day, we took the pole position and managed risk versus return: that was another day as explained the Professor. At this time, we consider high risk as a profitable “option”. [...]

[...] So we worked on what could constitute acceptable risk. It is true that this is different for everybody and to find common ground is very tough. If we were playing with money for the education of our children for example, it would be hard to get a consensus but it was a learning purpose with no true money so we considered many securing techniques (diversification, other tools for evaluating an investment and so managed to get better results. Those lasts were not as much exceptional as in class but we showed ourselves that we could play better in a bigger financial environment and make true profits. [...]