1 / 13

4. Portfolio theory

4. Portfolio theory. International Financial Services 2 Karel Bruna. Key drivers of investments. Yield Risk Liquidity. How to measure yield and risk on ex ante basis. yield (ex ante) E(R) = r 1. p 1 + r 2 .p 2 + … + r n. p n risk (ex ante)

deon
Download Presentation

4. Portfolio theory

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. 4. Portfolio theory International Financial Services 2 Karel Bruna

  2. Key drivers of investments • Yield • Risk • Liquidity

  3. How to measure yield and risk on ex ante basis yield (ex ante) E(R) = r1.p1 + r2.p2 + … + rn.pn risk (ex ante)  = ((r1 –E(R))2p1 + (r2–E(R))2p2 + … + (rn–E(R))2 pn)1/2

  4. The logic of diversification • to invest your wealth into more than one asset/instrument • to lower the weight of single asset/instrument in your wealth • to lower a probability of significant losses of your wealth arising from single asset/instrument negative yield • to make your wealth‘s yield/risk ratio lower due to imperfect correlation among different assets/instruments

  5. Yield and risk of two home assets portfolio(ex ante case) Expected rate of return: E(R1,2) = w1E(R1) + w2E(R2) Expected volatility: 1,2 = (w1212 + w2222 + 2w1w2 1 2COR1,2)1/2

  6. Foreign portfolio investments • Foreign investment allows investors to reduce the total risk of the portfolio while offering additional return potential • By expanding the investment opportunity set, international diversification helps to improve the risk-adjusted performance of a portfolio

  7. Yield and risk of home and foreign asset portfolio(ex ante case) Expected rate of return: E(RH,F) = wHE(RH) + wFE(RF) Expected volatility: H,F = (wH2H2 + wF2F2 + 2wHwFHFCORH,F)1/2

  8. Foreign asset as a special portfolio • Home currency value of foreign asset: VF = VFFER • Expected rate of return of foreign asset in home currency: E(RF) = E(RFF) + E(%ER) + (E(RFF)E(%ER)) • Expected volatility of foreign asset in home currency: F = (FF2 + ER2 + 2FFERCORF,ER)1/2

  9. Home and foreign diversified portfolios

  10. Correlation of Stock Markets(from Knif, Kolari, Pynnönen: What Drives Correlation Between Stock Market Returns? International Evidence, 2005)

  11. Stability of Correlations

  12. Stability of Correlations

  13. Portfolio Return Performance

More Related