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Lecture Investment analysis & portfolio management - Chapter 28

After studying this chapter you will be able to understand: Choosing an investment portfolio, to understand the capital asset pricing model and its uses in financial management systematic and unsystematic risk, to apply the adjusted present value approach to decision making. | Investment Analysis and Portfolio management Lecture: 28 Course Code: MBF702 Outline RECAP CHOOSING AN INVESTMENT PORTFOLIO To understand the capital asset pricing model and its uses in financial management SYSTEMATIC AND UNSYSTEMATIC RISK To apply the adjusted present value approach to decision making. Choosing an investment portfolio Investor preferences Efficient portfolios and the efficient frontier The market portfolio Risk-free investments and choosing an investment portfolio The market premium The beta factor of a portfolio Systematic and unsystematic risk Choosing an investment portfolio Risk-free investments and choosing an investment portfolio A stock market will have some risk-free investments. These are investments with no investment risk. In practice, government bonds denominated in the domestic currency are classified as risk-free investments. If a portfolio of risk-free investments is shown on a graph with the efficient frontier of portfolios and the market . | Investment Analysis and Portfolio management Lecture: 28 Course Code: MBF702 Outline RECAP CHOOSING AN INVESTMENT PORTFOLIO To understand the capital asset pricing model and its uses in financial management SYSTEMATIC AND UNSYSTEMATIC RISK To apply the adjusted present value approach to decision making. Choosing an investment portfolio Investor preferences Efficient portfolios and the efficient frontier The market portfolio Risk-free investments and choosing an investment portfolio The market premium The beta factor of a portfolio Systematic and unsystematic risk Choosing an investment portfolio Risk-free investments and choosing an investment portfolio A stock market will have some risk-free investments. These are investments with no investment risk. In practice, government bonds denominated in the domestic currency are classified as risk-free investments. If a portfolio of risk-free investments is shown on a graph with the efficient frontier of portfolios and the market portfolio, it will be shown as a point on the y axis, where risk is zero. This is shown as Portfolio G in the graph below. Choosing an investment portfolio Choosing an investment portfolio The market portfolio does not include risk-free investments. Investors, however, may choose a portfolio consisting partly of the market portfolio and partly of riskfree investments. A straight line can be drawn from the portfolio that is 100% risk-free (Portfolio G) to touch the efficient frontier at a tangent. This will be at the market portfolio M. An investor can select any portfolio on this line, such as Portfolio P, to provide a mixture of risk-free investments and the market portfolio investments. The line that joins Portfolio G and the market portfolio M is called the capital market line. The capital market line (CML) shows all combinations of risk-free investments and market portfolio investments that investors may select. Choosing an investment portfolio (Note: The CML extends beyond Portfolio M. .