Friday, 10 January 2020

Unit 10: Portfolio Analysis

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Unit 10: Portfolio Analysis

Portfolio means a collection or combination of financial assets (or securities) such as shares, debentures and government securities.

Business portfolio analysis as an organizational strategy formulation technique is based on the philosophy that organizations should develop strategy much as they handle investment portfolios.

Modern Portfolio Theory (MPT) proposes how rational investors will use diversification to optimize their portfolios, and how a risky asset should be priced.

The basic concepts of the theory are Markowitz diversification, the efficient frontier, capital asset pricing model, the alpha and beta coefficients, the Capital Market Line and the Securities Market Line.

A portfolio's return is a random variable, and consequently has an expected value and a variance.

An investor can reduce portfolio risk simply by holding combinations of instruments Notes which are not perfectly positively correlated.

The risk-free asset is the asset which pays a risk-free rate.

A rational investor would not invest in an asset which does not improve the risk-return characteristics of his existing portfolio.


Portfolio Leverage: An investor adds leverage to the portfolio by borrowing the risk-free asset.

Risk-free Asset: A hypothetical asset which pays a risk-free rate.

It is usually provided by an investment in short-dated Government securities.

The risk-free asset has zero variance in returns.

Specific Risk: Risk associated with individual assets - within a portfolio these risks can be reduced through diversification.


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