Learn finance, banking, risk, data science and fintech

Portfolio Diversification and Supporting Financial Institutions

In this lecture, Professor Shiller introduces mean-variance portfolio analysis, as originally outlined by Harry Markowitz, and the capital asset pricing model (CAPM) that has been the cornerstone of modern financial theory. Professor Shiller commences with the history of the first publicly traded company, The United East India Company, founded in 1602. Incorporating also the more

How to Calculate Portfolio Risk and Return

In this article, we will learn how to compute the risk and return of a portfolio of assets. Let’s start with a two asset portfolio. Portfolio Return Let’s say the returns from the two assets in the portfolio are R1 and R2. Also, assume the weights of the two assets in the portfolio are w1

Steps in Portfolio Management Process

The investment managers will typically follow the following investment management process to manage a client’s investment portfolio. Planning The first step is planning, which involves understanding the needs of the customer. This involves analysing the investor’s objectives and constraints, and creating an Investment Policy Statement (IPS). Without really understanding investor’s objectives for investing and the

Diversification Benefits

A diversification benefit exists when a portfolio’s standard deviation can be reduced without reducing expected return. The diversification benefit is possible when return correlations between portfolio assets is less than perfect positive correlation (<+1.0). If assets have less than a +1.0 correlation, then some of the random fluctuation around the expected trend rates of return

Mean-Variance Analysis Assumptions

Mean-variance analysis gives investors a framework to assess the tradeoff between risk and return as mean-variance analysis quantifies the relationship between expected return and portfolio variance (or standard deviation). Mean-variance analysis is the theoretical foundation of Modern Portfolio Theory established by Professor Harry Markowitz and much of the material covered in this module traces its

Real Estate Portfolios

In developed countries such as US and Europe, there are real estate indexes that provide a measure of average returns on real estate investments. Other countries also have recently developed real estate indexes. The returns from real estate consist of income and capital appreciation. Measuring the income from a property is easy but assessing appreciation

Immunization Against Non-parallel Shifts

One of the assumptions of the classical immunization theory is that if the interest rates change, the same changes by same quantum across all periods of maturities of bonds. However, at many a occasions, the change in interest rates may not be uniform across all the periods of bond maturities. Thus, equating the duration of