Portfolio Theory Capital Asset Pricing Model：投资组合理论和资本资产定价模型.ppt

Lecture 5: Portfolio Theory Capital Asset Pricing Model At the end of this session you should be able to: Distinguish between different types of risk; Calculate risk, return and covariance Explain relationship between risk and return; Discuss portfolio theory Calculate and explain beta Discuss the Capital Asset Pricing Model; Use CAPM to calculate project’s hurdle rate Discuss the uses and limitations of the capital asset pricing model Risk Risk possibility that actual future returns will be different from expected return. Risk implies that there is a chance for some unfavourable event to occur. Measurement of Risk Risk is the possibility that actual outcome will deviates from expected outcome. Risk is measured by standard deviation Measurement of Risk Lecture example 5.1 Security A Rate of Return Probability 8.5% 35% 11.0% 10% 13.5% 30% 16.0% 25% 100% Solution 5.1 Standard deviation Modern Portfolio Theory Risk Diversification: Process of spreading an investment across assets. It is based on common English saying “Don’t put all your eggs in one basket”. Modern Portfolio Theory Approaches to Risk Diversification Sharpe, Alexander and Bailey (1999) suggest the following approaches to risk diversification: Random or Na?ve Diversification Inter-industry diversification Inter-quality rating diversification Markowitz Risk diversification Risk Diversification Markowitz Risk Diversification Markowitz (1952) provides the tools for identifying portfolio which give the highest return for a particular level of risk. According to Markowitz, if an investor holds a portfolio of two assets he or she can reduce portfolio risk below the average risk attached to the individual assets. This can be achieved by investing in assets that have low positive correlation, or better still, a negative correlation. Example 5.2 Solution 5.2 Solution 5.2 Solution 5.2 Exercise 5.1 Now state the formula with the correct letters Solution 5.2