Portfolio Theory & Financial Analyses: Exercises by Bookboon.com

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Investors can tailor a portfolio to their specific riskreturn (utility) requirements, aiming to hold aggressive stocks with b in excess of one while the market is rising, and less than one (defensive) when the market is falling. 957 is only marginally defensive. 0 then her initial selection is eminently suitable. The ultimate proportional investments require little fine tuning. 0 and its price or return should be no more volatile than the average. The higher the beta factor relative to the market, the greater the return an investor will require (and vice versa).

67 x 8) = 28% This is the pension fund’s most efficient portfolio of investments because it provides the highest possible return for the prescribed level of risk. com 38 Portfolio Theory & Financial Analyses: Exercises The Market Portfolio 3. The CML Slope. The CML is a simple linear regression line, whose slope (αm) is a constant, measured by (30) αm = (rm – rf ) / sm Using the data for Silverbald, this constant may be defined as follows: (30) αm = (rm – rf ) / s m = (20 – 8) / 6 = 2% It indicates that for every one per cent of risk held by the company (its standard deviation) the market yields an expected return of two per cent above the risk free rate of 8 per cent.

Those who are highly risk-averse will only place a proportion of their funds in the market portfolio, with the remainder in risk-free securities. Conversely, speculative investors will place all their funds in the market portfolio and borrow at the risk-free rate to increase their market portfolio, until it satisfies their risk-return trade-off. Finally, we noted in our Theory text (PTFA) that the practical application of portfolio theory cannot eliminate risk entirely. The reduction in total portfolio risk only relates to the unsystematic (specific) risk associated with micro-economic factors, which are unique to individual sectors, companies, or projects.

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