Apologies, but I cannot get my head around this – how come adding a more riskier investment with positive correlation brings down the total risk? Could you may be try to explain in more detail?
It is a fundamental part of CAPM that even though virtually all shares are positively correlated, it is possible to reduce risk by creating a portfolio (it is the unsystematic risk that is removed) but that it is not possible to eliminate risk (the systematic risk remains and it is that that is measured by the beta). I go on to explain this in the later lectures. The calculation example is just to show how it can happen, but as I explain in the notes you cannot be asked calculations on this in the exam.
I have finally watched the videos on Portfolio Theory. I find it very interesting and very useful beyond writing to pass P4. I do not think the decision to remove it from the P4 syllabus is a good one. For me, this is the foundation to understanding the CAPM model.
I have one question though. As an investor and for practical purposes, how do I go about obtaining data to measure the riskiness of shares and their coefficient of correlation?
If you read the Introduction paragraph to the chapter in the lecture notes, you will see that you can no longer be asked for calculations on portfolio theory.
However, as again I have written in the paragraph, you are expected to understand the idea of portfolio theory and for that reason I have left the calculation examples there because it helps make sense of what portfolio theory is.
So no – you do not have to learn or use that formula.
ashiktamot says
Hi John , you mentioned that you would upload lectures on duration,, so please upload it soon,,,,
John Moffat says
When I have the time. However it is explained in the free lecture notes.
Lilly says
Apologies, but I cannot get my head around this – how come adding a more riskier investment with positive correlation brings down the total risk? Could you may be try to explain in more detail?
John Moffat says
It is a fundamental part of CAPM that even though virtually all shares are positively correlated, it is possible to reduce risk by creating a portfolio (it is the unsystematic risk that is removed) but that it is not possible to eliminate risk (the systematic risk remains and it is that that is measured by the beta). I go on to explain this in the later lectures.
The calculation example is just to show how it can happen, but as I explain in the notes you cannot be asked calculations on this in the exam.
accastudentofoman says
Is there a lecture video on Chapter 8 of Lecture Notes:
The Valuation of Debt Finance & The Macaulay Duration ?
eadinnu says
Good day Prof,
Portfolio theory is no longer in the syllabus. Does one really need to know it? Would it help understanding other aspects of the syllabus?
eadinnu says
Good afternoon prof,
I have finally watched the videos on Portfolio Theory. I find it very interesting and very useful beyond writing to pass P4. I do not think the decision to remove it from the P4 syllabus is a good one. For me, this is the foundation to understanding the CAPM model.
I have one question though. As an investor and for practical purposes, how do I go about obtaining data to measure the riskiness of shares and their coefficient of correlation?
John Moffat says
In practice that is not possible 馃檪
It is just the idea that creating a portfolio is a good idea for reducing risk.
mansoor says
the exam formula sheet , for example Dec 14, does not give the TWO Asset formula. does that mean we have to learn this formula?
John Moffat says
If you read the Introduction paragraph to the chapter in the lecture notes, you will see that you can no longer be asked for calculations on portfolio theory.
However, as again I have written in the paragraph, you are expected to understand the idea of portfolio theory and for that reason I have left the calculation examples there because it helps make sense of what portfolio theory is.
So no – you do not have to learn or use that formula.
veditahjps says
Hello Sir,
Can you shed more light on Macaulay Duration please.
Thanks
John Moffat says
It has nothing to do with portfolio theory!!
(It is explained separately in the free lecture notes)