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Investors seek to manage portfolio risk while maintaining returns. This involves understanding portfolio risk components. Diversification, particularly with assets having low correlations, can mitigate risk without necessarily lowering returns. Portfolio return is the weighted average of individual asset returns. Portfolio…

Risk aversion is related to investor behavior. Some investors are more comfortable with uncertainty in the outcome than others and are prepared to tolerate more risk in the pursuit of greater portfolio returns. Risk Seeking Risk seekers actively pursue risk…

All asset classes have risk and return characteristics. Historical returns are neither forward-looking nor expected returns. Nevertheless, it is noteworthy that by examining the performance of the historical returns, we can understand the likely characteristics of a particular asset class….

A business or economic cycle is a recurring sequence of alternating expansions (upswings) and contractions (downturns) in economic activity affecting broad segments of the economy. The phases of a business cycle occur at approximately the same time in an economy….

Demand Analysis under Oligopoly Competition The demand curves in oligopoly markets are influenced by the level of pricing interdependence among firms. When collusion exists in a market, the aggregate market demand curve is divided among the individual producers. In the…

Why Prediction Requires More Than a Fitted Line Regression is often used because analysts want to predict something: next month’s asset return, a company’s sales growth, a credit spread, a fund’s factor exposure, or a macroeconomic variable. The fitted line…

Monte Carlo simulations are about producing many random variables based on specific probability distributions. This helps estimate the probability of various outcomes. We will give an example to illustrate the Monte Carlo Simulation implementation. Steps Involved in Project Appraisal Imagine…

Securitization is a method that encompasses the pooling and transferring of the ownership of assets that generate cash flow, such as loans or receivables, to a special legal entity. This entity then offers securities, which are underpinned by these assets,…

//www.youtube.com/embed/PFbiNV1640k Cost of Capital The cost of capital is the rate of return the suppliers of capital (shareholders and debtholders) require as compensation for their capital contribution. In other words, the cost of capital can be seen as the opportunity…

Custom Fee Arrangements Hedge fund fees are often split into management and incentive fees. For example, a “2 and 20” fee structure implies that a fund manager charges an investor a 2% management fee based on the asset under management…