EXCEL COMPUTATION

PRESENTED BY

P.MOUNIKA

ROLL NO: 15DM029

GENERAL ASSUMPTIONS ON RISK-RETURN RELATIONSHIP• One basic assumption of portfolio theory is that as an investor you want to

maximize the returns from your investments for a given level of risk. • Portfolio theory also assumes that investors are basically risk averse, meaning

that, given a choice between two assets with equal rates of return, they will select the asset with the lower level of risk.

• Not all are risk averse investors , but when committing for a large sum of money for developing an investment portfolio are risk averse. Therefore, we expect a positive relationship between expected return and expected risk.

MARKOWITZ PORTFOLIO THEORY

• Harry Markowitz derived the expected rate of return for a portfolio of assets and an expected risk measure.

• Markowitz showed that the variance of the rate of return was a meaningful measure of portfolio risk under a reasonable set of assumptions. The portfolio variance formula indicated the importance of diversifying your investments and reduce the unsystematic risk of a portfolio but also showed how to effectively diversify.

CALCULATION OF EFFICIENT FRONTIER

CALCULATION OF ALPHA AND BETA WITH THEIR STATISTICAL SIGNIFICANCE

CALCULATION OF ALPHA AND BETA WITH THEIR STATISTICAL SIGNIFICANCE• If alpha value is less than p-value then the alpha is statistically significant. If

alpha value is greater than p-value then its is not statistically significant.• Beta is the sensitivity of stock to the market. If Beta greater than 1 then it is

termed as aggressive stock. If Beta less than 1 then it is termed as defensive stock.

CALCULATION OF CAPM

CALCULATION OF CAPM • The capital asset pricing model (CAPM) is a model that describes the

relationship between risk and expected return and that is used in the pricing of risky securities.

• According to CAPM the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. If this expected return does not meet or beat the required return, then the investment should not be undertaken.

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