Portfolio is grouping of financial assets such as stocks, bonds and cash equivalents. It is a collection of different securities that are combined and considered as a single asset by an investor.
Portfolios are held directly by the investors and managed by financial professionals altogether. The risk-return characteristics of the portfolio are different than the characteristics of assets that make up that portfolio especially with regard to risk.
This process of mixing together the broad classes to obtain return with minimum risk is called portfolio construction
CAPITAL ASSET PRICING MODEL
This model is used for prediction that how an investment returns is determined in an efficient capital market and it breaks up the riskiness of each security into two components namely the market related risk which cannot be diversified at all called systematic risk measured by the beta coefficient and other which can be eliminated through diversification is called unsystematic risk.
CAPM expected return of security is given is:
E(R) = Rf + ß (ERm - Rf )
E(R) = expected return of security ß = beta of security
Rf = risk free rate
ERm = expected return of market portfolio
Applications of CAPM model is as follows:
• Optimum portfolio depends upon market risk-return and individual investors differences in risk.
• Relation between expected return and risk is linearly related for all the portfolios and individual assets. o High beta portfolios earn high risk premiums. o Low beta portfolios earn low risk premiums.
• Stock price beta measures risk for all securities.
MARKOWITZ THEORY:
This theory is widely used in the construction of portfolio. Theory explain that for the given level of expected return in a group of securities one security domin...
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...g Per Share (EPS) Growth:
EPS Growth = {(Present year EPS / Last Year EPS – 1)} * 100
It indicates relative growth of EPS over the last two periods.
h) Book value (BV) Growth:
BV Growth = {(Present Year BV / Last Year BV – 1)} * 100
It indicates relative growth of BV over the last two periods.
3. Valuation Parameters:
Valuation ratios are related to Current Market Price. They are volatile in general.
a) Price to Earnings (PE) ratio:
PE = Current Market Price / EPS
Price to Earnings ratio is the important parameter. It indicates valuation ratio of a company's current share price compared to its per-share earnings.
b) Price to Book (P/B):
P/B = CMP / BV
Price to Book ratio is very important ratio for value investors.
c) Dividend Yield:
Dividend Yield = Dividend per share / Current Market Price
This indicates dividend return in percentage terms of total investments.
The first financial ratio of the analysis is the Price to Earnings ratio (“P/E ratio”). The ratio is computed by dividing the price of one share of common stock, by the earnings per share of common stock. This analysis uses diluted earnings per share which assumes the issuance of new stock for all existing stock options. Also, the price of the stock was computed as an average of the fourth quarter high and low stock prices published in the 10K report of each company, because the year end stock prices were not listed for all the companies. Because the P/E ratio measures the relative costliness of different stocks, in relation to their income, it provides a useful place to begin the analysis.
This is market prospect ratio and it calculates the market value of the stock in relation to the earnings per share. It indicates that what the market is prepared to pay for stock looking into its current earnings.
The fourth ratio we will analyze is earnings per share. Earnings per share (EPS) are the number of dollars earned during the period on behalf of each outstanding share of common stock.
Dimensional's value strategies are based on the Fama/French research in multifactor portfolios designed to capture the return premiums associated with high book-to-market (BtM) ratios.
...r investments that can support the other weight and balance their portfolio and therefore alleviate some of the risk they face.
One of these ratios is the price earnings ratio (P/E). The Price-Earnings Ratio is an assessment ratio of a business' existing share fee likened to its earnings per share (EPS). It is computed as the market
The price earnings ratio shows what a company’s stock is worth on the market based off of current earnings. This is important in finances and the stock market because the pe ratio can help determine future earnings per share. Verizon has a pe ratio of 19.9. NTT has a ratio of 9.5. AT&T has a ratio of 31.4. From an investors perspective AT&T has the best indication of a better future performance. The higher the ratio the
Market Risk is also known as Systematic Risk due to its broad impact on investments. The level of Market Risk depends on the probability that the entire market will decline and drag down the values of all companies. With Market Risk, investors stand to lose value irrespective of the companies, business sectors, or investment vehicles they are invested in. It can be difficult for investors to protect themselves against market risk, since investment strategies, like diversification, is mostly ineffective (Investopedia,
In your response, build upon extant portfolio theory and make sure to talk about different types of risks that investors might face and how they go about managing such risks. This means you need to consider topics such as efficient frontier and optimal portfolios; as well their relevance to investment theory. Furthermore, given the nature of the assignment, avoid bringing the brokerage industry into your discussion. In other words, assume you can invest directly in the stock market and do not need any financial intermediaries like brokerage houses.
The MDA model also showed potential to ease some problems in the selection of securities for a portfolio, but further investigation was recommended.
To maximize optimum performance of our investment portfolio, we placed a certain percentage of equity in different sectors of the stock market.
Capital Asset Pricing Model (CAPM) is an ex ante concept, which is built on the portfolio theory established by Markowitz (Bhatnagar and Ramlogan 2012). It enhances the understanding of elements of asset prices, specifically the linear relationship between risk and expected return (Perold 2004). The direct correlation between risk and return is well defined by the security market line (SML), where market risk of an asset is associated with the return and risk of the market along with the risk free rate to estimate expected return on an asset (Watson and Head 1998 cited in Laubscher 2002).
Asset allocation decisions made by an investor are considered more important than other decisions such as market timing or security selection. In the research provided by Hensel (1991), performance attribution is one of the main components when choosing the right assets in a portfolio. The impact of any investment decision can be measured by comparing its outcome with the outcome of some alternative decision. Furthermore, according to Hensel (1991), every investor has to incorporate the minimum-risk portfolio, which is a combination of securities or asset classes that reduces the uncertainty of future portfolio returns to a minimum.
Stock market prediction is the method of predicting the price of a company’s stock. It is believed that stock price is lead by random walk hypothesis. Random walk hypothesis states that stock market price matures randomly and hence can’t be predicted. Pesaran (2003) states that it is often argued that if stock markets are efficient then it should not be possible to predict stock returns. In fact, it is easily seen that stock market returns will be non-predictable only if market efficiency is combined with risk neutrality. On the other hand it is also been concluded that using variance ratio tests long horizon stock market returns can be predicted....
Using the Modern Portfolio Theory, overtime risk assets will provide a higher expected rate of return, as compensation to the investors for accepting a high risk. The high risk will eventually lower collecting asset classes to the portfolio, thus reducing the volatile risk, and increasing the expected rates of return. Furthermore the purpose of this theory is to develop the most optimal investments portfolio which would yield the highest rate of return while ascertaining the risk for the individual or corporate investor.