INTRODUCTION:
The investment terrain has seen some major changes in the last two decades. Financial and technology companies came and went, stock market values soared, plummeted and rebounded, housing derivatives blew up, and other foundations were laid bare. Even the core of investing theories related to portfolios has come under pressure. Yet the belief in Modern Portfolio Theory has remained strong amongst the investors. Modern Portfolio Theory (MPT) is a theory that tells investors how to minimise risks associated with investment and at the same time, maximise return on the investments by proper resource allocation and diversifying their portfolios – it is based on the theory that risk can be lessened by diversifying into uncorrelated asset classes. However, unless the correlations of the various asset classes are predictable, the reduction of risk may be lost. Investors expect to be rewarded for the level of risk they are taking in a particular market. According to the theory, it's possible to construct an "efficient frontier" of optimal portfolios offering the maximum possible expected return for a given level of risk and there are four basic steps involved in portfolio construction: Security Valuation, Asset Allocation, Portfolio Optimization and Performance measurement. This theory of portfolio selection was coined by Harry Markowitz in his paper ‘Portfolio Selection’ which was published in the Journal of Finance in March, 1952. Even before Markowitz in 1952, investors were familiar with the notion being able to reduce exposure to risk by diversifying their portfolios. The proverb ‘never put all your eggs in one basket’ underlies this idea. Through his paper, Markowitz was able to use a mathematical framework to study the effects of asset risk, return, correlation and diversification on probable portfolio returns and was awarded the John von Neumann Theory Prize and the Nobel Memorial Prize in Economic Sciences. GROUND BREAKING:

...CHAPTER 9
THE CAPITAL ASSET PRICING MODEL
9.1 THE CAPITAL ASSET PRICING MODEL
1. The CAPM and its Assumptions
The capital asset pricing model (CAPM) is a set of predictions concerning equilibrium expected re¬turns on risky assets. Harry Markowitz laid down the foundation of modernportfolio man¬agement in 1952. The CAPM was developed 12 years later in articles by William Sharpe (1964), John Lintner (1965), and Jan Mossin (1966). The time for this gestation indicates that the leap from Markowitz's portfolio selection model to the CAPM is not trivial.
We summarize the simplifying assumptions that lead to the basic version of the CAPM in the following list. The trust of these assumptions is that we try to assure that individuals are as alike as possible, with the notable exceptions of initial wealth and risk aversion. We will see that conformity of investor behaviour vastly simplifies our analysis.
1. There are many investors, each with an endowment (wealth) that is small compared to the total endowment of all investors. Investors are price-takers, in that they act as though security prices are unaffected by their own trades. This is the usual perfect competition assumption of microeconomics.
2. All investors plan for one identical holding period. This behavior is myopic (short¬-sighted) in that it ignores everything that might happen after the end of the single-period horizon. Myopic behavior is, in general,...

...Notes
Chapter 19
Portfolio Selection
Chapter 19 Charles P. Jones, Investments: Analysis and Management, Eighth Edition, John Wiley & Sons Prepared by G.D. Koppenhaver, Iowa State University
Portfolio Selection
• Diversification is key to optimal risk management • Analysis required because of the infinite number of portfolios of risky assets • How should investors select the best risky portfolio? • How could riskless assets be used?
Building a Portfolio
• Step 1: Use the Markowitz portfolio selection model to identify optimal combinations • Step 2: Consider riskless borrowing and lending possibilities • Step 3: Choose the final portfolio based on your preferences for return relative to risk
PortfolioTheory
• Optimal diversification takes into account all available information • Assumptions in portfoliotheory
– A single investment period (one year) – Liquid position (no transaction costs) – Preferences based only on a portfolio’s expected return and risk
An Efficient Portfolio
• Smallest portfolio risk for a given level of expected return • Largest expected return for a given level of portfolio risk • From the set of all possible portfolios
– Only locate and analyze the subset known as the efficient set
• Lowest risk for given level of return...

...Post-ModernPortfolioTheory
PMPT Definition, Investment Strategy, and Differences With MPT
By Kent Thune
See More About
alternative investing
build a portfolio
mutual fund analysis
See More About
alternative investing
build a portfolio
mutual fund analysis
Definition: Post-ModernPortfolioTheory (PMPT) is an investing theory and strategic investment style that is a variation of ModernPortfolioTheory (MPT). Similar to MPT, PMPT is an investing method where the investor attempts to take minimal level of market risk, through diversification, to capture maximum-level returns for a given portfolio of investments.
PMPT History and Difference With MPT
PMPT is the culmination of research from many authors and has expanded over several decades as academics at universities in many countries tested these theories to determine whether or not they had merit. The term post-modernportfoliotheory was first used in 1991 to describe portfolio construction software created by engineers Brian M. Rom and Kathleen Ferguson. Rom and Ferguson first publicly described their ideas about PMPT in the 1993 Journal of Investing article, Post-ModernPortfolioTheory Comes of Age.
The difference...

...Strategic Asset Allocation: Determining the Optimal Portfolio with Ten Asset Classes
Niels Bekkers Mars The Netherlands
Ronald Q. Doeswijk* Robeco The Netherlands
Trevin W. Lam Rabobank The Netherlands
October 2009
Abstract
This study explores which asset classes add value to a traditional portfolio of stocks, bonds and cash. Next, we determine the optimal weights of all asset classes in the optimal portfolio. This study adds to the literature by distinguishing ten different investment categories simultaneously in a mean-variance analysis as well as a market portfolio approach. We also demonstrate how to combine these two methods. Our results suggest that real estate, commodities and high yield add most value to the traditional asset mix. A study with such a broad coverage of asset classes has not been conducted before, not in the context of determining capital market expectations and performing a mean-variance analysis, neither in assessing the global market portfolio. JEL classification: G11, G12 Key words: strategic asset allocation, capital market expectations, mean-variance analysis, optimal portfolio, global market portfolio. This study has benefited from the support and practical comments provided by Jeroen Beimer, Léon Cornelissen, Lex Hoogduin, Menno Meekel, Léon Muller, Laurens Swinkels and Pim van Vliet. Special thanks go to Jeroen Blokland and...

...the managed portfolio over the investment period, from the 12th March to the 11th of May 2012 being a period of nine trading weeks. This portfolio performance evaluation report is prepared to determine whether the portfolio had any abnormal performance and this could be done by better market timing as well as good stock selections by investors, by being able to identify whether the stock is over-performed or under-performed. Myportfolio will be assessed in terms of breath and depth followed by looking only at the depth of the performance of my portfolio. Depth is the size of the magnitude of the abnormal or excess returns earned by the manager, which is the ability to earn “above-average” returns whereas breadth refers to the number of different securities for which the manager can generate excess returns. This means that the ability to completely eliminate all non-systematic risk relative to the portfolio’s benchmark. The measurement of depth and breadth could be obtained through the regression analysis as well as risk adjusted performance measures, which would be the Capital Market Line (CML), Capital Allocation Line (CAL), the Sharpe Ratio and the M2 index. The depth of the portfolio is done by looking at the portfolio’s Security Characteristics Line (SCL) and the R2 together with the discussion of the slope and intercept and statistical significance. The Treynor Measure and the...

...MULTIPLE CHOICE QUESTIONS
Chapter # 07
AN ITRODUCTION TO PORTFOLIO MANAGEMENT
1. The optimal portfolio is identified at the point of tangency between theefficient frontier and the
a. Highest possible utility curve.
b. Lowest possible utility curve.
c. Middle range utility curve.
d. Steepest utility curve.
2. An individual investor’s utility curves specify the tradeoffs he or she is willing to make between
e. High risk and low risk assets.
f. High return and low return assets.
g. Covariance and correlation.
h. Return and risk..
3. As the correlation coefficient between two assets decreases, the shape of the efficient frontier
i. Approaches a horizontal straight line.
j. Bends out.
k. Bends in.
l. Approaches a vertical straight line.
4. A positive covariance between two variables indicates that
m. The two variables move in different directions.
n. The two variables move in the same direction.
o. The two variables are low risk.
p. The two variables are high risk.
5. A positive relationship between expected return and expected risk is consistent with
q. Investors being risk seekers.
r. Investors being risk avoiders.
s. Investors being risk averse.
t. All of the above.
6. What information must you input to a computer program in order to derive theportfolios that make up the...

...Portfolio Management
Strayer University
1.Analyze the relationship between risk and rate of return, and suggest how you would formulate a portfolio that will minimize risk and maximize rate of return.
The relationship between risk and rate of return is risk determines expected rates of return on every existing asset investment. The Risk-Return relationship is characterized as being a "positive" or "direct" relationship. (Importance of risk relationship , 2001). In other worlds if the risk of investing on an investment is high then the return will also be high.. Alternatively, if an investment has relatively lower levels of expected risk then the investor will get relatively lower returns. The risk and rate of return relationship effects both business managers and individual investors. The higher the chance of risk the more likely it must be compensated with higher return.
“Since investment returns reflects the degree of risk involved with the investment, investors need to be able to determine how much of a return is appropriate for a given level of risk.”(Importance of risk relationship, 2001). In other words the risk for investment returns needs to be determined before the investment is carried out so that the investor knows what level of risk they are at. This process is called “pricing the risk". The price of risk is defined as the measure of risk quantified to determine how much...

...Financial Management: FIN 534
Diversification in Stock Portfolio
Diversification in Stock Portfolio
Background
As a risk averse investor, I am considering investing in one of two economies. The expected return with volatility of all stocks in both economies is the same. In the first economy, all stocks move together, in good times all prices rise together and in bad times they all fall together. In the second economy, stock returns are independent; one stock increasing in price has no effect on the prices of other stocks.
Diversified Portfolio
There are certain guidelines I need to consider when investing and creating a diversified portfolio. First, I must be cognitive of my risk capabilities in order to manage risk within my portfolio. Secondly, Systematic and Nonsystematic are two types of risks that I need to be knowledgeable of also.
Systematic or market risk: This risk pertains to each capital market, which can be volatile. For example, a significant political event could affect several of the assets in my portfolio. It is virtually impossible to protect myself against this type of risk. When the stock market averages fall, most individual stocks fall and when interest rates rise nearly all-individual bonds and preferred shares fall in value. Systematic risk cannot be diversified away; the more a portfolio becomes diversified, the more it ends up mirroring the...