equity risk premium. Edgar Lawrence Smith’s 1924 book Common Stocks as Long Term Investments […] was immediately cited by Yale’s Irving Fisher as an argument for investing in a diversified portfolio of equities over bonds.5 Fisher theorized that the trend towards investment in diversified portfolios of common stock had actually changed the equity premium in the 1920’s. Studies of various writers‚ especially Edgar Smith and Kenneth Van Strum have shown that in the long run stocks yield more
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Portfolio Management Case 1: Alex Sharpe’s Portfolio Executive Summary As Alex Sharpe’s consultant‚ we recommend a portfolio of 78% S&P 500 and 22% of R.J Reynolds. This portfolio will generate an annual expected return of 8.86% (significantly higher than the index return 6.29%)‚ while the risk increases by only less than 10%. In Qualitative Analysis‚ we find that tobacco industry tends to move with the market less than the toy industry‚ which indicates that R.J Reynolds can diversity the
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Between CML AND SML CML vs SML CML stands for Capital Market Line‚ and SML stands for Security Market Line. The CML is a line that is used to show the rates of return‚ which depends on risk-free rates of return and levels of risk for a specific portfolio. SML‚ which is also called a Characteristic Line‚ is a graphical representation of the market’s risk and return at a given time. One of the differences between CML and SML‚ is how the risk factors are measured. While standard deviation is the measure
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ABSTRACT Modern portfolio managers find themselves facing an increasingly challenging situation with global asset allocation. The concept of traditional asset classification has been constantly questioned yet no consensus has been reached upon in either real practice or academia. Our research attempts to answer the question of whether or not the traditional asset class definition could prove to be optimal in terms of generating the best efficient frontiers‚ and if it exist alternatives to reach
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asset be 0.25‚ and the investor holds an equally weighted portfolio of these assets. How many of such assets should an investor hold so that the variance of her portfolio is zero? (b) If the correlation was 0.02 can the investor ever achieve a zero variance? (c) For the case that the correlation is 0.4‚ and the investor holds an equally weighted portfolio of 10 assets‚ calculate the amount of unsystematic and systematic risk in her portfolio. 2. (Diversification over time). Suppose an investor invests
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the riskiness of a financial asset is measured in terms of the riskiness of its cash flows. (2)The riskiness of an asset may be measured on a stand-alone basis or in a portfolio context. An asset may be very risky if held by itself but may be much less risky when it is a part of a large portfolio. (3)In the context of a portfolio‚ the risk of an asset is divided into two parts: diversifiable risk (unsystematic risk) and market risk (systematic risk). Diversifiable risk arises from company-specific
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T-Bills 5.5% 5.5 5.5 5.5 5.5 High Tech -27.0% -7.0 15.0 30.0 45.0 Collections 27.0% 13.0 0.0 -11.0 -21.0 1.0% 0.0 13.2 13.2 -0.87 U.S. Rubber 6.0%a -14.0 3.0 41.0 26.0 9.8% 18.8 1.9 0.88 Market Portfolio 2-Stock Portfolio -17.0% -3.0 10.0 25.0 38.0 0.0% 7.5 12.0 10.5% 15.2 1.4 3.4 0.5 a Note that the estimated returns of U.S. Rubber do not always move in the same direction as the overall economy. For example‚ when the economy
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line (SCL) and obtain an estimate of its true beta coefficient; then we use the findings to estimate and plot the Security Market Line (SML). In doing so‚ we have two purpose to fulfill. First‚ demonstrating the fact that the total variance of a portfolio approaches the systematic variance as diversification increases‚ which means diversifying across industries offer benefit over diversifying within a given industry. Second‚ using the figures estimated to testify that the CAPM works in practice.
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PRODUCT PORTFOLIO Coca-Cola India offers a comprehensive range of beverages. They include Coca-Cola‚ Diet Coke‚ Thums Up‚ Fanta‚ Limca‚ Sprite‚ Maaza‚ Maaza Milky Delite‚ Minute Maid Pulpy Orange‚ Minute Maid Nimbu Fresh‚ Minute Maid Mixed Fruit‚ Minute Maid Apple‚ Georgia‚ Georgia Gold‚ Kinley‚ Kinley Club Soda and Burn.Some of the recent product launches that have added to the company’s product portfolio have been launch of Fanta Fun Times‚ and Nimbu Fresh. In addition in course of exploring
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discusses the Berkshire Hathaway phenomenon in the context of modern finance theory. Part 1 Modern Portfolio Theory Berkshire Hathaway’s investing strategies mainly differ with modern portfolio theory on two aspects. The first one is the attitude towards the undesirable thing in investment. And the second one is the perspective of diversification. As Harry Markowitz pointed out in Portfolio Selection‚ one of the assumptions is (Markowitz‚ 1952)“the investor does (or should) consider expected
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