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    Portfolio Theory

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    singarajusarath
    This document discusses various concepts in modern portfolio theory including types of risk, the Capital Asset Pricing Model, Markowitz efficient frontier, capital market line, security market line, Sharpe ratio, Treynor ratio, and Jensen's alpha. It provides definitions and explanations of these key terms and models used to evaluate risk and return in portfolio management.

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    Portfolio Theory

    Uploaded by

    singarajusarath
    37 views10 pages
    This document discusses various concepts in modern portfolio theory including types of risk, the Capital Asset Pricing Model, Markowitz efficient frontier, capital market line, security market line, Sharpe ratio, Treynor ratio, and Jensen's alpha. It provides definitions and explanations of these key terms and models used to evaluate risk and return in portfolio management.

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    Portfolio Theory (1).pptx

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    This document discusses various concepts in modern portfolio theory including types of risk, the Capital Asset Pricing Model, Markowitz efficient frontier, capital market line, security market line, Sharpe ratio, Treynor ratio, and Jensen's alpha. It provides definitions and explanations of these key terms and models used to evaluate risk and return in portfolio management.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    37 views10 pages

    Portfolio Theory

    Uploaded by

    singarajusarath
    This document discusses various concepts in modern portfolio theory including types of risk, the Capital Asset Pricing Model, Markowitz efficient frontier, capital market line, security market line, Sharpe ratio, Treynor ratio, and Jensen's alpha. It provides definitions and explanations of these key terms and models used to evaluate risk and return in portfolio management.

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    You are on page 1of 10

    Portfolio Theory 1

    Types of Systematic Risk:


    Risk In This refers to market risks that cannot be reduced through diversification,
    or the possibility that the entire market and economy will show losses that
    Portfolio negatively affect investments.

    Unsystematic Risk:
    Also called specific risk, unsystematic risk is specific to individual stocks,
    meaning it can be diversified as you increase the number of stocks in your
    portfolio.

    2
    CAPM is widely used throughout finance for pricing
    risky securities and generating expected returns for
    Capital assets given the risk of those assets and cost of
    capital.
    Asset
    Pricing ERi​=Rf​+βi​(Rm​−Rf​)
    ​

    Model
    It describes the relationship between systematic risk
    and expected return for assets, particularly stocks.

    3
    Pioneer by Harry Markowitz
    MODERN MAXIMIZE RETURN - MINIMIZE RISK
    PORTFOLI
    O THEORY There are two main concepts in
    Modern Portfolio Theory, which are;
    • Any investor's goal is to maximize Return for any
    level of Risk.
    • Risk can be reduced by creating a diversified
    portfolio of unrelated assets

    A B Average

    RISK 12% 8% 10%

    RETURN 10% 10% 10%


    4
     
    MARKOWITZ
    EFFICIENT
    FRONTIER
    It is a graphical representation
    of all the possible mixtures of
    risky assets for an optimal
    level of Return given any level
    of Risk, as measured by
    standard deviation.

    5
    ▪ The capital market line (CML) represents portfolios that
    optimally combine risk and return.
    ▪ The intercept point of CML and efficient frontier would
    CAPITAL result in the most efficient portfolio called the tangency
    portfolio.
    MARKET
    LINE

    6
    ▪ SML gives the expected return of the market at different
    SECURITY levels of systematic or market risk.

    MARKET
    LINE

    7
    ▪ commonly used to gauge the performance of an
    investment by adjusting for its risk.
    Sharpe ▪ It’s all about maximizing returns and reducing

    Ratio ▪
    volatility
    As a generalization, buy assets if Sharpe ratio is
    above CML and sell if Sharpe ratio is below CML.
    ▪ Used to evaluate a single stock or investment, or an
    entire portfolio.
    ▪ The higher the ratio, the greater the investment return
    relative to the amount of risk taken, and thus, the
    better the investment.

    Sharpe Ratio = (Rx – Rf) / StdDev Rx


    8
    ▪ The Treynor ratio is a risk/return measure that allows investors to
    adjust a portfolio's returns for systematic risk.

    Treynor ▪ A higher Treynor ratio result means a portfolio is a more suitable


    investment.

    Ratio ▪ The Treynor ratio is similar to the Sharpe ratio, although the Sharpe
    ratio uses a portfolios standard deviation to adjust the portfolio returns.

    Treynor Ratio= (rp-rf)/ βp
    Where : rp ​=Portfolio return
    rf​=Risk-free rate
    βp​=Beta of the portfolio​
    9
    ▪ It is a measure of the excess returns earned by the
    portfolio compared to returns suggested by the
    Jensen’s CAPM model.

    Alpha ▪ It represents by the symbol α.

    Where:
    • Rp = Returns of the Portfolio
    • Rf = Risk-free rate
    • β = Stock’s beta
    • Rm = Market return

    10

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