Portfolio Management

canipungoel
Good Student
Posts: 27
Joined: Mon Feb 23, 2015 3:38 am

Portfolio Management

Postby canipungoel » Mon Feb 23, 2015 3:44 am

Q.1 What is the meaning of Capital Market Theory?
Q.2 What is the meaning of Equilibrium return?
Q,3 What is the meaning of Security Characteristic Line?
Q.4 What is the meaning of Endowment and Foundation?

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Portfolio Management

Postby edupristine » Mon Feb 23, 2015 11:27 am

Hi, answer to your queries are as follows:

Q.1 What is the meaning of Capital Market Theory?
Sol 1- The capital market theory is a model that prices assets and mostly shares. When one tries to formulate a financial, investment, or retirement plan, he or she employs a theory such as arbitrage pricing theory, capital asset pricing model or modern portfolio theory. The most widely used capital market theory is capital asset pricing model.
In capital market theory we deal with issues like the role of the capital markets, the initial public offerings and the role of the venture capital in capital markets, financial innovation any many more.
Assumptions of capital market theory are:
1. All Investors are Efficient Investors
2. Investors Borrow/Lend Money at the Risk-Free Rate
3. The Time Horizon is equal for All Investors
4. All Assets are Infinitely Divisible
5. No Taxes and Transaction Costs
6. All Investors Have the Same Probability for Outcomes
7. No Inflation Exists
8. There is No Mispricing Within the Capital Markets

Q.2 What is the meaning of Equilibrium return?
Sol 2- Equilibrium returns are determined using the Capital Asset Pricing Model (CAPM). This model separates risk into systematic and non-systematic components. Systematic risk cannot be diversified away whereas idiosyncratic risk is diversifiable.

Q,3 What is the meaning of Security Characteristic Line?
Sol 3- A plot on the graph of the excess return on a security over the risk-free rate as a function of the excess return on the market. The slope of this line is the security's beta.

Q.4 What is the meaning of Endowment and Foundation
Endowment fund is established for providing financial support on a specific purpose. Example: universities have endowment funds for providing scholarships to the students. Foundation fund is set up for charitable purposes for supporting specific type of acts or funding to research about a disease.

canipungoel
Good Student
Posts: 27
Joined: Mon Feb 23, 2015 3:38 am

Postby canipungoel » Mon Feb 23, 2015 2:37 pm

It is agreed that Equilibrium is determined by CAPM. But please help me to know when we can say that our return is at equilibrium.

Also confirm that why equilibrium return is low when systematic risk is more and unsystematic risk is less in the total risk of portfolio and vice versa?

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Portfolio Management

Postby edupristine » Thu Feb 26, 2015 4:52 am

Hi, CAPM is an equilibrium model. Returns calculated from this model are already in equilibrium.
Also, returns are low when systematic risk (also known as non-diversifiable) because it is company specific risk which cannot be diversified. where as in case of unsystematic risk can diversified away can increase the returns and vice versa.


Return to “CFA Level I”



cron

Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.