Portfolio Theory – some salient points
- Risk of the average is not equal to the average of the risk
- shifting the efficient frontier to North west , the portfolio can be optimised to an extent
- efficient frontier :- standard way of showing return and risk relationship
- Expand the universe of investible asset classes to produce a new efficient frontier
- correlation
- strategic asset allocation ( defined by objectives ) and tactical asset allocation ( depends upon investment policy )
- Rebalance Portfolio if financial markets have different expected returns
- MPT ( modern Portfolio Theory ) by Markowitz in 1952 – portfolio needs to be diversified
- Distribution of returns ( can be derived by change in prices )
- Metric used for measuring dispersion – standard deviation ( from the average )
- scatter plot for measuring correlation ( -1 to 1 ) – measure for dependence
- Three measures :- Expected return , standard deviation and Correlation
- optimal Portfolio creation need the above three measures only
- variance = STD * STD
- covariances – correlation * std1 * std2 – can take any value
- Value appreciation vs. risk undertaken ( risk / return trade off )
- efficient frontier : highest return at a specific level of risk
Nishant Govil 