Rpl Mrpl Assessing Risk And Return Essay

1726 words - 7 pages

Financial Management- IICase NotesRPL and MRPL - Analyzing Risk and ReturnSubmitted By- Sumer Lal MeenaExe-PGP 2007-09Background ReadingThe Capital Asset Pricing Model (CAPM)Some, but not all, of the risk associated with a risky investment can be eliminated by diversification. The reason is that unsystematic risks, which are unique to individual assets, tend to wash out in a large portfolio, but systematic risks, which affect all of the assets in a portfolio to some extent, do not.Because unsystematic risk can be freely eliminated by diversification, the systematic risk principle states that the reward for bearing risk depends only on the level of systematic risk. The level of systematic risk in a particular asset, relative to average, is given by the beta of that asset.The reward-to-risk ratio for Asset i is the ratio of its risk premium, E(Ri) - Rf, to its beta, Bi: [E(Ri) - Rf]/BiIn a well-functioning market, this ratio is the same for every asset. As a result, when asset expected returns are plotted against asset betas, all assets plot on the same straight line, called the security market line (SML).From the SML, the expected return on Asset i can be written: E(Ri) = Rf +Bi[E(Rm) - Rf]This is the capital asset pricing model (CAPM). The expected return on a risky asset thus has three components. The first is the pure time value of money (Rf), the second is the market risk premium, [E(Rm) - Rf], and the third is the beta for that asset, Bi.The CAPM implies that the risk premium on any individual asset or portfolio is the product of the risk premium of the market portfolio and the asset's beta.The CAPM assumes investors are rational single-period planners who agree on a common input list from security analysis and seek mean-variance optimal portfolios.The CAPM assumes ideal security markets in the sense that: (a) markets are large, and investors are price takers, (b) there are no taxes or transaction costs, (c) all risky assets are publicly traded, and (d) any amount can be borrowed and lent at a fixed, risk-free rate. These assumptions mean that all investors will hold identical risky portfolios.The CAPM implies that, in equilibrium, the market portfolio is the unique mean-variance efficient tangency portfolio, which indicates that a passive strategy is efficient.The market portfolio is a value-weighted portfolio. Each security is held in a proportion equal to its market value divided by the total market value of all securities. The risk premium on the market portfolio is. proportional to its variance and to the risk aversion of the average investor.In a single-index security market, once an index is specified, any security beta can be estimated from a regression of the security's excess return on the index's excess return.This regression line is called the security characteristic line (SCL). The intercept of the SCL, called alpha, represents the average excess return on the security when the index excess return is zero. The CAPM implies that...

Find Another Essay On RPL-MRPL-Assessing Risk and Return

Soluble fms-like tyrosine kinase-1 and vascular endothelial growth factor:

2768 words - 12 pages VEGF at gestational age 6-9 weeks as predictor for pregnancy loss. Results: Mean serum levels of sFlt-1 and VEGF were significantly higher in RPL group than controls (10439.7±385.4 vs 3304.5±104.8; P<0.0001, for sFlt-1, and 1885.0±98.3 vs 709.8±24.8; P<0.0001, for VEGF). Receiver operating characteristic (ROC) curves analyses established that sFlt-1 and VEGF were able to discriminate women at risk of developing pregnancy loss with area under ROC

Equity vs Debt Essay

637 words - 3 pages Equity vs Debt Financial Statement Information - Debt and Equity Holders Debtholders and equityholders as claimants to a firm’s future cashflows are interested in assessing risk. Debtholders Debtholders are primarily interested in assessing whether the firm’s cashflow will be sufficient to make interest and principal payments on a timely basis The lower the probability of a cash shortfall, the lower the risk to the debtholder

Key Issues Relative to Portfolio Analysis and Investment

1777 words - 7 pages THEORYModern Investment Theory also known as Modern Portfolio Theory (MPT) was introduced by Harry Markowitz with his paper "Portfolio Selection," which appeared in the 1952 Journal of Finance (riskglossary.com, 2006). Prior to Markowitz's work, investors focused on assessing the risks and rewards of individual securities that offered the best opportunities for gain with the least risk and then construct a portfolio from these (riskglossary.com

Gandhism Is Always a Powerful Tool of Social Change

1463 words - 6 pages 1. Introduction “I shall be alive in the grave and what is more, speaking from it” M.K. Gandhi The essence of the above quoted is very much the central idea of Vizai’s play The Return of Gandhi. The play aptly attacks the rot in present day political system. The play has won Nandi Award in 2002 given by the Government of Andhra Pradesh in

How Useful are Financial Models: The Base Case

1671 words - 7 pages cases is profitable for the business venture. THE USEFULNESS OF MODELLING METHODS IN ASSESSING FINANCIAL RISKS There are different types of financial models that could be used in assessing the financial risk of a project or a company. These include • Traditional and • Discounted Cash Flow (DCF) Method TRADITIONAL METHODS This is one method used in assessing financial risk that does not put into consideration the time value of money. This

Peachtree Securities Case

874 words - 3 pages expected return. 3. The standard deviation provides a measurement of the total risk by examining the tightness of the probability distribution associated with the different possible outcomes whereas the coefficient of variation measures risk per unit. The coefficient of variation is a better measure when investments have different expected returns and different levels of total risk. When risk is considered, the best alternative depends on

Assessing Risks with International Diversification

2109 words - 9 pages Assessing Risks with International Diversification I believe that all investors hope to get a higher than expected return on their investment at a minimum downside risk. Investing in global markets has begun to make sense for an increasing number of investors as U.S. equities only make up less than 40 percent of world equities and an even small fraction of the total world wealth (Bodie, Kane &Marcus, 2014).By 2011, more than 50 countries had an

Risk Analysis on Investment Decision

1097 words - 4 pages %) with capital expendituresDigital Image12,55329.6%W-Comm14,70232.5Profitability Index/IRR (in%)Digital Image1.2629.60W-Comm1.4231.70Assessing the two opportunities, both are very close in value. After careful scrutiny; assessing possible scenarios and unforeseen possibilities; probabilities of risk factors; and calculating the NPV, IRR and PI, Silicon Arts, Incorporated should consider choosing the W-Comm project. The analyst used the best risk

VaR is a method of assessing risk that uses standard statistical tehniques routinely used in other tehnical fields. Based on firm scientific foundations, VaR provides users with a summary measure of...

3789 words - 15 pages poor supervision and management of financial risks. Spurred into action, financial institutions and regulators turnet to value at risk, an easy-to understand metod for quantifying market risk.VaR is a method of assessing risk that uses standard statistical tehniques routinely used in other tehnical fields. Formally VaR measures the worst expected loss over a given horizon under normal market conditions at a given confidence level. Based on firm

Prospect Theory

1148 words - 5 pages rather than a change from state of wealth to another. When given a choice between getting $1000 with certainty or having a 50% chance of getting $2500 people may well choose the certain $1000 in preference to the uncertain chance of getting $2500 even though the mathematical expectation of the uncertain option is $1250. This is known as risk-aversion. But Kahneman and Tversky found that the same people when confronted with a certain loss of $1000

Mutual Fund Performance in Bull and Bear Market: The Case of Pakistani Mutual Fund

1090 words - 4 pages Appendix 1. Sharpe Model Another method of estimation of mutual fund performance with regard to the risk and return are Sharpe ratio and Treynor. The Sharpe ratio is estimated as return in excess of risk free rate (Treasury Bill Rate) to the standard deviation of portfolio. It is also used to compare the performance of different mutual funds in the mutual funds industry of a economy of country. The requisite model have been borrowed from

Similar Essays

Risk And Return Tradeoff Memo Essay

1036 words - 4 pages The process of portfolio construction can be quite complex. Analysts go through reams of statistics - past performance, future potential, and industry knowledge and rely on personal insights into the market to arrive at the final list (UOP, 2008). This memo will be based on the Constructing and Managing a Portfolio Simulation which details the fundamentals of portfolio construction in relation to the risk-return tradeoff and the relationship

Risk And Return Trade Off Memo

978 words - 4 pages with minimal risk and the highest yield possible. At that time the following capital market information was true.Market Risk 15%Risk-Free Rate4.88%Market Return 11%Additionally, the following eight companies were provided as options for investments; the financial team was asked to chose the four stocks that would best suit Casa Bonita's investment goals and risk tolerance.1.Desktop, Inc.; the largest seller of office supplies worldwide. Products

The Portfolio Theory In Minimizing The Risk And Maximizing The Return

1910 words - 8 pages Introduction:Portfolio theory founded by Markowtz (1952) is a revolutionary theory changed finance profession from 'arts' to 'science'. It gives direction of how to minimize risk at a given return or maximize return at a given return. A portfolio is a bundle of assets with different levels of return and risk. The constituent assets are combined with relative weights. Portfolio theory studies how the characteristics (e.g. risk and return) of

Discuss These Titles About The Asx: Risk And Return, Aims Of Investment, Considerations For Setting Up A Portfolio, Shares & Alternative Investment. Make Reference To The Profiles!

1739 words - 7 pages The principles of risk and return:Fundamentally, the greater the return the greater the risk; in other words there is a direct relationship between risk and return. An investor acting in rational self interest would only invest in a speculative investment if the investor is compensated by a greater return. For instance, gambling has the greatest risk attached, and also it potentially has the greatest return. However, government bonds have little