金融代写|FINC6009 Portfolio Theory

Beta factors exhibit the following pivotal characteristics:
The market as a whole has a $\beta=1$
A risk-free security has a $\beta=0$
A security with systematic risk below the market average has a $\beta<1$ A security with systematic risk above the market average has a $\beta>1$
A security with systematic risk equal to the market average has a $\beta=1$

Just as beta factors can be defined to interpret the systemic risk of individual investments, they can also be applied to a portfolio of investments.

Consider an equity fund manager with a highly diversified investment portfolio. It is close to the market portfolio, which her company still wishes to track. With new funds available, she chooses to add the following plc common stocks to the fund with individual betas quoted from a commercial service.
$\begin{array}{ll}\text { Investment } & \text { Quoted } \ \text { Jones } & 0.83 \ \text { Taylor } & 1.15 \ \text { Wyman } & 0.83 \ \text { Stewart } & 1.14\end{array}$

With betas within a narrow range above and below the market average of 1.0, these investments should represent a spread of risk that doesn’t compromise the current risk profile of her fund. However, before any detailed risk assessment can be undertaken, the proportion of funds allocated to each investment must be determined.

The Review Activity for Chapter Six of our Theory text focussed on capital market volatility and its implications for active portfolio management designed to “beat the market”. This was presented as an alternative to a passive strategy of “buy and hold” that uses a tracker fund based on stock market indices. Of particular interest now, is whether the assumptions of efficient markets and the techniques of stock market analyses with which you are familiar (fundamental and technical) support one approach, rather than another, in today’s business environment. The purpose of the Exercise is to test your knowledge of the volatile world within which portfolio fund managers apply their theories.
Required:
1) Outline the reasons for stock market volatility over the past decade.
2) Given your previous study of the efficient market hypothesis (EMH) and the assumptions upon which it is based, briefly explain the weakness of “technical” and “fundamental” analyses in volatile markets.
3) Without access to insider information (the strong form EMH) or pure speculation, evaluate the relative merits of “active” and “passive” portfolio strategies for trading securities when markets are characterised by geo-political, economic, business and financial uncertainty?
4) Briefly summarise the findings of your research.

If you have read the SFM Theory and Exercise texts you will already be familiar with how companies and securities are valued using dividend and earnings models, as well as their strengths and weaknesses. If not you should revise Chapter Five of both books.

A fundamental problem associated with all dividend and earnings valuations, (even those of Gordon and Modigliani-Miller op. cit.) is how to price risk, particularly when markets are volatile. To summarise, they fail to discriminate between the impact of macro economic factors on market values and the effects of micro economic factors caused by events affecting individual companies.

In this respect, the CAPM based on portfolio theory is a superior model. By formally pricing risk, it not only evaluates the characteristics of a particular security, but also those for a portfolio.