Portfolio Standard Deviation
The standard deviation of a portfolio of assets, or portfolio risk, is simply not the sum of the risk of the underlying securities. Due to the correlation between securities, the computation of portfolio risk must incorporate this correlation relationship. Computing…
Mean, Variance and Covariance
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
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…
What Are Asset Classes?
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….
Business Cycle and Its Phases
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….
Oligopoly Competition
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…
Predicted Values, Standard Error, Prediction Intervals, and Functional Forms in Regression
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 Simulation in Finance: Modeling Asset Prices, Returns, and Investment Risk
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…
Data Presentation as a Histogram or a Frequency Polygon
Histogram A histogram shows the distribution of numerical data in the form of a graph. However, it is very similar to a bar chart, a histogram groups data into intervals. To construct a histogram, you need to establish all the…
Guidance for Standards I-VII
I. Professionalism Knowledge of the law Independence and objectivity Misrepresentation Misconduct Competence II. Integrity of Capital Markets Material non-public information Market manipulation III. Duties to Clients and Prospective Clients Loyalty and prudence Fair dealing Suitability Performance presentation Preservation of confidentiality IV. Duties…
