FINANCIAL CHRONICLE™
Dear Reader,

Registration with the Sri Lanka FINANCIAL CHRONICLE™️ would enable you to enjoy an array of other services such as Member Rankings, User Groups, Own Posts & Profile, Exclusive Research, Live Chat Box etc..

All information contained in this forum is subject to Disclaimer Notice published.


Thank You
FINANCIAL CHRONICLE™️
www.srilankachronicle.com


Join the forum, it's quick and easy

FINANCIAL CHRONICLE™
Dear Reader,

Registration with the Sri Lanka FINANCIAL CHRONICLE™️ would enable you to enjoy an array of other services such as Member Rankings, User Groups, Own Posts & Profile, Exclusive Research, Live Chat Box etc..

All information contained in this forum is subject to Disclaimer Notice published.


Thank You
FINANCIAL CHRONICLE™️
www.srilankachronicle.com
FINANCIAL CHRONICLE™
Would you like to react to this message? Create an account in a few clicks or log in to continue.
FINANCIAL CHRONICLE™

Encyclopedia of Latest news, reviews, discussions and analysis of stock market and investment opportunities in Sri Lanka

LISTED COMPANIES

Submit Post


ADVERTISE
Poll

EXCHANGE RATE PREDICTION: 2022

 
 
 
 

View results

ශ්‍රී ලංකා මූල්‍ය වංශකථාව - සිංහල
Submit Post


CONATCT US


Send your suggestions and comments

* - required fields

Read FINANCIAL CHRONICLE™ Disclaimer



Latest topics

» LOFC Future
by rukshan1234 Today at 1:51 am

» Buy lofc tomorrow - Maharaja
by Dasun Maduwantha Today at 12:32 am

» SGH buys EXPO from retailers
by blindhog Yesterday at 11:04 pm

» LOLC FINANCE PLC (LOFC.N0000)
by Surajmp Yesterday at 8:44 pm

» L G I L - Maharaja special
by Chula Yesterday at 8:13 pm

» HAYLEYS PLC (HAYL.N0000)
by cseboss Yesterday at 11:34 am

» NO FURTHER INCREASE IN TAXES-PRES. RANIL WICKRAMASINGHE
by ADVENTUS Tue Aug 09, 2022 3:48 pm

» AAIC 100 = SCAP 16
by Equity Win Tue Aug 09, 2022 2:11 pm

» CARGO BOAT DEVELOPMENT COMPANY PLC (CABO.N0000)
by Dasun Maduwantha Tue Aug 09, 2022 12:10 pm

» Nestle‚ declares highest ever dividend
by Shiranli Tue Aug 09, 2022 11:24 am

» PRIME LANDS RESIDENCIES PLC (PLR.N0000)
by Anushka Perz Tue Aug 09, 2022 11:15 am

» MULTI FINANCE PLC (MFL.N0000)
by Eleven Mon Aug 08, 2022 9:28 pm

» AGSTAR PLC (AGST.N0000)
by Thushara Ayya Mon Aug 08, 2022 4:18 pm

» ACL; MELS; HHL; BIL; LWL- STOCKS TO WATCH
by ADVENTUS Mon Aug 08, 2022 1:43 pm

» LIOC ....Get in soon
by samaritan Mon Aug 08, 2022 11:49 am

» Sinopec likely to enter Lankan fuel market
by samaritan Mon Aug 08, 2022 9:41 am

» RW - Rescue Warrior of Sri Lanka's Economy
by reyaz Mon Aug 08, 2022 8:17 am

» Should Central bank increase Interest rates?
by reyaz Mon Aug 08, 2022 7:52 am

» LPRT and CHOT old and profitable businesses, yet severely undervalued
by sheildskye Sun Aug 07, 2022 12:05 pm

» Day Trader may find a stock attractive if it moves a lot during the day. Stock market for beginners and day traders
by Asoka Samarakone Sat Aug 06, 2022 11:54 am

EXPERT CHRONICLE™

MARKET CHAT


CHRONICLE™ ANALYTICS


ECONOMIC CHRONICLE

GROSS DOMESTIC PRODUCT (GDP)


CHRONICLE™ YouTube

LATEST TWEETS

You are not connected. Please login or register

FINANCIAL CHRONICLE™ » CORPORATE CHRONICLE™ » Understanding Modern Portfolio Theory (MPT)

Understanding Modern Portfolio Theory (MPT)

Go down  Message [Page 1 of 1]

nobileprize55


Equity Analytic
Equity Analytic

[ltr][size=13][size=15]Understanding Modern Portfolio Theory (MPT)
Modern portfolio theory argues that the risk and return characteristics of an investment should not be considered separately, but should be judged by how the investment affects the overall risk and return of the portfolio. MPT shows that an investor can create a portfolio of multiple assets that maximizes returns for a given level of risk. Likewise, given the desired level of expected return, an investor can build a portfolio with the lowest possible risk. Based on statistics such as variance and correlation, the performance of individual investments is less important than how they affect the entire portfolio.
[/ltr][/size][/size]
Gold Signals
[size][size][ltr][size]
 
MPT assumes that investors are risk averse, that is, they prefer a less risky portfolio to a more risky one for a given level of return. In practice, risk aversion implies that most people must invest in multiple asset classes.
 
The expected portfolio return is calculated as the weighted sum of the individual asset returns. If a portfolio contains four equally weighted assets with expected returns of 4, 6, 10, and 14%, the expected portfolio returns are:
[/size][/ltr][/size][/size]
Gold Signals
[size][size][ltr][size]
 
 
(4% x 25%) + (6% x 25%) + (10% x 25%) + (14% x 25%) = 8.5%
 
Portfolio risk is a complex function of the variance of each asset and the correlation of each pair of assets. To calculate the risk of a portfolio with four assets, an investor needs the variance of each of the four assets and six correlation values, since there are six possible combinations of two assets with four assets. Because of asset correlation, the overall portfolio risk or standard deviation is lower than what would be calculated using a weighted sum.
https://www.gold-pattern.com/en
Benefits of Modern Portfolio Theory (MPT)
MPT is a useful tool for investors trying to build diversified portfolios. In fact, the rise of exchange-traded funds (ETFs) has made the MPT more relevant by giving investors easier access to various asset classes. Equity investors can use the MPT to mitigate risk by placing a small portion of their portfolios in government bond ETFs. Portfolio variance will be significantly lower as government bonds are negatively correlated with stocks. Adding a small investment in Treasury bonds to a portfolio of stocks will not have much of an impact on expected returns due to this loss-reducing effect.
 
Similarly, MPT can be used to reduce the volatility of a US Treasury portfolio by investing 10% in a small-cap index fund or ETF. While small-cap stocks are much more risky than Treasury bonds themselves, they often do well during periods of high inflation when bonds perform poorly. As a result, the overall volatility of the portfolio is lower than the portfolio of all government bonds. In addition, the expected return is higher3.
[/size][/ltr][/size][/size]
Gold Signals

Gold Signals

 
Modern portfolio theory allows investors to build better performing portfolios. Every possible combination of assets that exist can be plotted with portfolio risk on the X-axis and expected returns on the Y-axis. This plot reveals the most desirable portfolios. For example, suppose portfolio A has an expected return of 8.5% and a standard deviation of 8%. Further, assume that portfolio B has an expected return of 8.5% and a standard deviation of 9.5%. Portfolio A will be considered more efficient because it has the same expected return but less risk.
[size][size][ltr][size]
 
An upward curve can be drawn to connect all the top performing portfolios. This curve is called the effective frontier. Investing in a portfolio below the curve is undesirable because it does not maximize returns for a given level of risk.
https://www.gold-pattern.com/en
 Most performance frontier portfolios contain ETFs from more than one asset class.
Critique of Modern Portfolio Theory (MPT)
Perhaps the biggest criticism of the MPT is that it evaluates portfolios based on variance rather than downside risk. According to modern portfolio theory, two portfolios with the same level of variance and return are considered equally desirable. One portfolio can have this variance due to frequent small losses. On the contrary, another may have such a difference due to rare spectacular falls. Most investors would prefer frequent small losses that are easier to bear. Postmodern Portfolio Theory (PMPT) attempts to improve modern portfolio theory by minimizing the risk of deterioration instead of variance.
 
[/size][/ltr][/size][/size]
Gold Signals

Back to top  Message [Page 1 of 1]

Permissions in this forum:
You cannot reply to topics in this forum