the company has asked me why there is a need for an internal control system when controls are in place with insurance and portfolio approaches. Insurance Approach A company will purchase insurance to protect their assets. The owner of a company will purchase liability insurance to protect his income, home, and other personal items of worth. The company will do a risk analysis to determine the most significant risks of the company. Then the company will purchase insurance to mitigate these risks
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Understanding the Concepts Freddie Bailey FIN 100 Professor John Underwood May 27, 2012 Identify the components of a stock’s realized return. A realized return is the amount of actual gain that is made on the value of a portfolio over a specific evaluation period. The components of a stock are realized return is dividends, distributions, and share price appreciation. Dividends play a very important role in stock realized dividends may be in the form of cash, stock or property
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A. Sears FIN/402 April 13, 2015 Richard E. Smith Risk and Tradeoff Memo To: Rainier Ekstrom From: Joe A. Sears Subject: Portfolio Selection and Investment Strategy According to risk and yield as well as the detailed assessment, the decision to select four investments was of high regards, in addition to making a choice to minimize risk, in addition portfolio diversification, which assisted in the reduced risks. In order to assist in making the correct decisions there are particular pieces
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Chapter 06 Efficient Diversification 1. So long as the correlation coefficient is below 1.0, the portfolio will benefit from diversification because returns on component securities will not move in perfect lockstep. The portfolio standard deviation will be less than a weighted average of the standard deviations of the component securities. 2. The covariance with the other assets is more important. Diversification is accomplished via correlation with other assets. Covariance helps determine
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DEUR=dP0dr=-1(1+r)*t=1Tt*C(1+r)t Duration of the Portfolio DPortfolioMAC= DBond1MAC*P0Bond1P0Portfolio+DBond2MAC*P0Bond2P0Portfolio * The higher Duration the more sensitive is the Bond to changes of interest rate Markowitz Portfolio theory: Expected Return: μ=1ni=1nri Variance: σ2=1(n-1)i=1n(ri-μ)2 Standard Error: Err=σn Covariance: σAB=1(n-1)i=1n(riA-μA)(riB-μB) Correlation coefficient: ρAB=σABσAσB Markowitz Portfolio Theory: σ2=a2σA2+b2σB2+2abσAB μ=arA+(1-a)rB Portfolio of identical Stocks: σPortfolio=1nσOne
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asset held in isolation, risk is measured with the probability distribution and its associated statistics: the mean, the standard deviation, and the coefficient of variation. The concept of diversification is examined by measuring the risk of a portfolio of assets that are perfectly positively correlated, perfectly negatively correlated, and those that are uncorrelated. Next, the chapter looks at international diversification and its effect on risk. The Capital Asset Pricing Model (CAPM) is then
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Alex Sharpe’s Portfolio 1. Returns and Risk Estimate and compare the returns and variability (i.e. annual standard deviation over the past five years) of Reynolds and Hasbro with that of the S&P 500 Index. Which stock appears to be riskiest? S&P: Monthly average return=0.57% Annual return= 6.89% Annual SD= 12.477% (monthly SD 3.60* 3.46 (square of 12)) Reynolds: Monthly average return= 1.87% Annual return= 1.87% * 12= 22.50% Annual SD: 32.446% (monthly SD 9.37* 3.46 (square of
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five funds based on the sharpe ratio, and Jensen alpha calculations. I also compared the result to the earlier analysis done based on average return, standard deviation and beta. Sharpe ratio, measures investment performance of the portfolio compared to risk taken. It’s most appropriate to use when evaluating diversified portfolios. Sharpe ratio penalizes non-diversified portfolios by also taking into account unsystematic risk. The high sharpe ratio represents the better performance for taking
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is to do so succinctly yet in a manner designed to emphasize the economic content of the theory. Following this, I modify the model to reflect an extreme case of an institutional arrangement that can preclude investors from choosing fully optimal portfolios. In particular, I assume that investors are unable to take negative positions in assets. For this version of the model I draw heavily from papers by Glenn (1976), Levy (1978), Merton (1987) and Markowitz (1987, 1990). Finally, I discuss the stock
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management focusing on quantitative models applied to equities and bonds (with emphasis on mortgage-backed securities). The quantitative models discussed are asset allocation models and portfolio construction models that include optimization models (mean-variance framework and extensions such as robust portfolio optimization), multi-factor risk models, risk control models, and transaction cost forecasting models. Return attribution models for performance evaluation will be covered. Model risk and
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