Modern Portfolio Theory (MPT) is a theory originally developed by Harry Markowitz which help risk-averse investors to construct a portfolio by maximizing expected return with a given level of market risk by constructing an efficient frontier (Investopedia, n.d.). This theory focus on effect of investment in the overall portfolio risk and return instead of looking at individual assets risk and return alone. A portfolio of various assets that can maximize the return at a given risk level can be constructed. Every investor hopes to see high possible long-term return with the minimum short-term market risk. MPT theory promote that an investor can hold an individual risky asset such as mutual fund but the risk will be reduced and the portfolio will
The mechanism of finance in this market has large maturity periods. The insecurity and inaccurate prediction on the expected rate of returns or even possibility of losses in an investment is defined as “risk” in financial terms. . The Capital Market Theory was created upon the Markowitz Portfolio Model. Their crucial and important assumptions of the above mentioned theory are as follows; • All investors are resourceful investors- Investors follow Markowitz idea of the efficient frontier and thus prefer to invest in ranges of and along the boundary.
More importantly, elasticity is unit-free, and thus can be considered a convenient measurement that captures sentiment induced fluctuations in financial markets. This section derives the elasticity of both equity and bill prices with respect to sentiment factors to explore the effect of sentiment fluctuations on asset price volatility. First, sentiment variations significantly influence equity price volatility. Second, both sentiment factors affect equity price volatility more than bill price volatility because the elasticity of equity prices to both sentiment factors exceeds that of bill prices. Third psychological research suggests that positive sentiment generally guides people to underestimate risk or take more risk.
The Sharpe Ratio is a common metric used to measure the mean return per unit of risk in a hedge fund investment strategy. It measures the excess returns over the risk free rate and divides this excess return by the portfolio’s risk, which is also its standard deviation. This metric is applicable across hedge funds with different investment strategies. Generally speaking, a hedge fund portfolio with a Sharpe Ratio of 1 and above tends to generate attractive returns. Additionally, the Sharpe Ratio can be used to determine if a hedge fund is generating excess returns over what was predicted using the Capital Asset Pricing Model (CAPM).
Fair value accounting (FVA) has pros and cons itself. It depends on how the fair value applied by the companies. Supporters of FVA argue that FVA can increase transparency for presenting financial statement to the third parties (Ian E. Scott, 2010). Increased transparency allows users to better understand financial performance and true picture of the company and gain additional insights in making decisions. According Zijl and Whittington (2006), fair values are useful for investors and increase transparency.
Capital Asset Pricing Model:- Capital asset pricing model (CAPM) is a theoretically model used to determine required Rate of return or expected return of an asset with its relationship between Risk which is user in the pricing of risky securities or stocks. This means that the higher risk you take, higher potential return should be to offset your risk, this model is dependent on a risk multiplier called the beta CAPM Model assists the investor to calculate the Risk and what type of return they should expect on their Investment. Ra = Rf + βa (Rm-Rf) Where Rf is the Risk free rate βa is the Beta of the security Rm is the expected market return. Investors need to be compensated on Time value of money and Risk where Time value of money is mentioned
To avoid this, you can use the bottom-up method. Bottom-up approach The bottom-up approach allows you to make profitable investments by looking at the overall performance and financial criteria. Also, this method can be used by all types of businesses. A bottom-up approach is vital for targeted investment and it is a top priority nowadays. Despite these, you can perform an investment analysis by determining the following
However, it is essential to know the bull and bear of the stock market for investing in it. The Stock market for investment also includes the equity market and nifty market. You can invest in equities and nifty market and get good amount profit by focused approach and keen analysis of market trend. Bonds - It is the best ways to gain interest on your principal amount. The interest and period of time depends on the agreement.
Which is mean the capital budgeting help the company to reduce or avoid the risk that they have face it. Also, its help the company to estimate which investment option would yield the best possible return. To be more clear, the investment is very important for the company to help get the best return. Moreover, its help the company to make long term strategic investment. Furthermore, the company can take the method from different techniques of capital budgeting to decide if it is good for take the project or not.