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Portfolio Management (Beta (Reflects sensitivity of individual share to…
Portfolio Management
Beta
Reflects sensitivity of individual share to fluctuations in market
Company financed by only equity will have a project beta = equity beta
Measures shares non-diversifiable risk (systematic risk)
Market Beta = 1
Variance of Portfolio
(Weighting^2
Variance) + (Weighting^2
Variance) + 2(Weighting)(Weighting) * Covariance
Covariance
(Correlation of portfolio)(standard deviation)(standard deviation)
Correlation co-efficient of portfolio
Stand. Dev of portfolio / Stand. Dev. o* Stand. Dev
Portfolio Risk
Riskiness of individual shares
Relationship between their returns
Correlation
High correlation = risk is close to weighting
Variability of portfolio returns is similar to individual shares
Less likely to result in a reduction of risk
Correlation = 0 = no risk
Required return on a share
Risk-free rate + Beta(Expected market return - Risk-free rate)
Capital Asset Pricing Model
Risk is less than weighted average of risk