Introduction to Portfolio Theory: Part 16 Hard đź§
Calculate beta of the Amazon public stock! Use publicly available data and rely on the information for the last 3 years.
The relevant market will be NASDAQ.
Can you estimate the beta without calculating it exactly?
Using the results of your calculation, explain what beta means and compare the value you calculated with the values publicly available for the Amazon stock (are they the same or different and why?)!
Introduction to Portfolio Theory: Part 15 Medium đź§
1. What sort of investor rationally views the variance of an individual security’s return as the security’s proper measure of risk?
What is the risk of the portfolio for this investor?
2. What sort of investor rationally views the beta of a security as the security’s proper measure of risk?
What is the risk of the portfolio for this investor?
Consider the following possible returns both on the stock of Transformers Optimus, Inc., and on the market:
Assume that each state is equally likely to occur! Plot the characteristic line of the stock Transformers Optimus and calculate the slope of the characteristic line!
Plot the feasible set of the portfolios consisting of a risky portfolio (defined as Portfolio R) consisting of 35% of AT&T, 40% of Ford, and 25% of Dell public stocks and a risk-free asset, which is the 1-Y US Treasury Bill in this case.
Show the points of the portfolios of 70% in the risk-free asset and the rest in Portfolio R, 35% in risk-free asset and the rest in Portfolio R, and a riskless borrowing case in which you borrow 40% of your original capital and combine the amount borrowed with your original capital to invest solely in Portfolio R.
Also investigate the feasible set of portfolios for which you borrow at 7% and invest all your funds in the Portfolio R, together with the case in which you borrow 40% and invest all your funds in Portfolio R.
For the risk-free asset, use the info on 5th of February, 2024 and for the stocks, use the info for the last 3 years to estimate the necessary input values.
Your company has both debt-type AFS and passive equity-type AFS investments. You did not sell them during the fiscal year. Your debt investments increased in value while your equity investments depreciated. How will this situation affect your net earnings for the year end? Ignoring the effects of all other transactions, will your comprehensive income for the year be greater or lower than your net income? How will these changes affect your cash flows from operations? Can you make a definite judgement on the change in the ending balance of the stockholder’s equity on the balance sheet, assuming that the company did not pay any dividends at year end?
There are many traditional economic indicators investors can rely on. Some work more efficiently than others do while many are still imperfect to gauge market sentiment. In this article, I will investigate whether put/call ratio can be a reliable, albeit contrarian, market sentiment indicator.
Apart from traditional economic indicators that will help investors to monitor business cycles, VIX is also touted as a measure that may help investors foresee what is about to befall them.
Previously, I wrote about reliability issues with respect to complex financial models and measures here: https://bit.ly/3M8Lp0S
Is VIX any different from such models and measures? Does VIX really have such a predictive power? Is it reliable? Can VIX be manipulated, too as is the case with other financial securities?
In this article, I will answer these questions.
Ability to comprehend a company’s financial statements is an important and sought-after skill whether you are a retail investor, a corporate executive, an equity analyst, or an investment banker. These statements are generally full of accounting jargon and long-winded.
In this video, I used Microsoft’s most recent 10-K as an example to show you how to navigate through a 116-page financial document effectively and in a time-saving manner.
Important Note: People knowledgeable about financial accounting and corporate finance will find it easier to wade through such financial statements and in many instances financial accounting and corporate finance knowledge are prerequisites as they facilitate the process immensely. This is also true for this video.
Total duration of the video: Part 1: 33mins 48secs; Part 2: 16mins 45secs
In the second part, I provide examples from equities, ETFs, and cryptocurrencies. These financial instruments are deemed inherently riskier than some types of fixed income securities are on which, as the name suggests, absolute returns are somewhat fixed. However, within each asset class except for cryptocurrencies, there are equities and ETFs for which perceived risks are lower. An equity that has both a diversified business model and an impeccable track record against downturns may be deemed less risky. By the same token, ETFs containing highly diversified (i.e. in very broad terms fewer perfectly correlated) stocks may be less risky. Obviously, these risks profiles will yield disparate returns in different future events such as upturns and downturns.
My focus will be again more diverted to understanding risks rather than calculating them.
In finance, the so-called plain vanilla models to calculate the risk of a financial instrument are sometimes more reliable than the complex models claimed to be “accurate”. Plain vanilla models are criticized because of their backward looking fundamentals; however, complex models allegedly benefitting from “cutting-age” machine learning and/or deep learning still cannot predict the future as the models based on these methods are also being trained on the backward looking data. To that end, for investors who do not have complex tools at their disposal, understanding risks prove to be more practical than calculating them accurately. Furthermore, behavioral aspects of finance, as well as centralization within the financial markets, will distort your trades and investments, more so for short-term than for long-term.
In this first part, I will cover FX and bond markets. In the second part, I will provide additional examples from equities, ETFs, and cryptocurrencies.
