Portfolio Theory & Financial Analyses

This book and Exercises evaluate Modern Portfolio Theory (Markowitz, CAPM, MM and APT) for future study. From the original purpose of MPT through to asset investment by management, we learn why anybody today with the software and a reasonable financial education can model portfolios. However, one lesson from the 2007 meltdown is that computer driven models are so complex that hardly anybody understands what is going on. Returning to first principles, we learn why investors and not their computers should always interpret their results. Moreover, MPT is a guide to action and not a substitute. Investors should understand the models that underpin the computer programmes they run.

Part I: An Introduction

1. An Overview
Introduction
1.1 The Development of Finance
1.2 Efficient Capital Markets
1.3 The Role of Mean-Variance Efficiency
1.4 The Background to Modern Portfolio Theory
Summary and Conclusions
Selected References

Part II: The Portfolio Decision

2. Risk and Portfolio Analysis
Introduction
2.1 Mean-Variance Analyses: Markowitz Efficiency
2.2 The Combined Risk of Two Investments
2.3 The Correlation between Two Investments
Summary and Conclusions
Selected References

3. The Optimum Portfolio
Introduction
3.1 The Mathematics of Portfolio Risk
3.2 Risk Minimisation and the Two-Asset Portfolio
3.3 The Minimum Variance of a Two-Asset Portfolio
3.4 The Multi-Asset Portfolio
3.5: The Optimum Portfolio
Summary and Conclusions
Selected References

4. The Market Portfolio
Introduction
4.1 The Market Portfolio and Tobin’s Theorem
4.2 The CML and Quantitative Analyses
4.3 Systematic and Unsystematic Risk
Summary and Conclusions
Selected References

Part III: Models of Capital Asset Pricing

5. The Beta Factor
Introduction
5.1 Beta, Systemic Risk and the Characteristic Line
5.2 The Mathematical Derivation of Beta
5.3 The Security Market Line
Summary and Conclusions
Selected References

6. The Capital Asset Pricing Model (CAPM)
Introduction
6.1 The CAPM Assumptions
6.2 The Mathematical Derivation of the CAPM
6.3 The Relationship between the CAPM and SML
6.4 Criticism of the CAPM
Summary and Conclusions
Selected References

7. Capital Budgeting, Capital Structure and the CAPM
Introduction
7.1 Capital Budgeting and the CAPM
7.2 The Estimation of Project Betas
7.3 Capital Gearing and the Beta Factor
7.4 Capital Gearing and the CAPM
7.5 Modigliani-Miller and the CAPM
Summary and Conclusions
Selected References

Part IV: Modern Portfolio Theory

8. Arbitrage Pricing Theory and Beyond
Introduction
8.1 Portfolio Theory and the CAPM
8.2 Arbitrage Pricing Theory (APT)
Summary and Conclusions
Selected References

Appendix for Chapter 1

With an eclectic record of University teaching, research, publication, consultancy and curricula development, underpinned by running a successful business, Alan has been a member of national academic validation bodies and held senior external examinerships and lectureships at both undergraduate and postgraduate level in the UK and abroad.

With increasing demand for global e-learning, his attention is now focussed on the free provision of a financial textbook series, underpinned by a critique of contemporary capital market theory in volatile markets, published by bookboon.com.

To contact Alan, please visit Robert Alan Hill at www.linkedin.com.