Chapter 5
Modern Portfolio Concepts
.1 Outline
Learning Goals
I. Principles of Portfolio Planning
A) Portfolio Objectives
B) Portfolio Return and Standard Deviation
C) Correlation and Diversification
1. Correlation
2. Diversification
3. Impact on Risk and Return
D) International Diversification
1. Effectiveness of International Diversification
2. Methods for International Diversification
3. Benefits of International Diversification
Concepts in Review
II. The Capital Asset Price Model (CAPM)
A) Components of Risk
B) Beta: A Popular Measure of Risk
1. Deriving Beta
2. Interpreting Beta
3. Applying Beta
C) The CAPM: Using Beta to Estimate Return
1. The Equation
2. Historical Risk Premiums
3. The Graph: The Security Market Line (SML)
4. Some Closing Comments
Concepts in Review
III. Traditional Versus Modern Portfolio Theory
A) The Traditional Approach
B) Modern Portfolio Theory
1. The Efficient Frontier
2. Portfolio Betas
a. Risk Diversification
b. Calculating Portfolio Betas
c. Using Portfolio Betas
d. Interpreting Portfolio Betas
3. The Risk-Return Tradeoff: Some Closing Comments
C) Reconciling the Traditional Approach and MPT
Concepts in Review
IV. Constructing a Portfolio Using an Asset Allocation Scheme
A) Investor Characteristics and Objectives
B) Portfolio Objectives and Policies
C) Developing an Asset Allocation Scheme
1. Approaches to Asset Allocation
a. Fixed Weightings
b. Flexible Weightings
c. Tactical Asset Allocation
2. Asset Allocation Alternatives
3. Applying Asset Allocation
Concepts in Review
Summary
Putting Your Investment Know-How to the Test
Discussion Questions
Problems
Case Problems
5.1 Traditional Versus Modern Portfolio Theory: Who’s Right?
5.2 Susan Lussier’s Inherited Portfolio: Does It Meet Her Needs?
Excel with Spreadsheets
Trading Online with OTIS
.2 Key Concepts
1. The concept of a portfolio, the importance of portfolio objectives, and the calculation of the return and...