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.

There are Paper F9 lectures on the valuation of debt (because that is revision from F9).
I wil try to find time to record a lecture on the duration soon.

Hi,
What I understood, the more the possible returns on two investments are -vely correlated the more likely the overall reduction in risk. Is it true?

If it is true, then if they are +vely correlated what still cause the reduction in overall risk?

You need to watch the remaining lectures on portfolio theory as well, because I explain that it is because the unsystematic risk is being reduced.
In practice investments are positively correlated due to the systematic risk, but it is by creating a portfolio that the unsystematic risk can be removed.

I assume you have downloaded the lecture notes (otherwise there is no point in watching the lecture)?
Tha last line of the question says “the new investment will comprise 20% of his enlarged portfolio” (so the other 80% must be in the existing portfolio).

Do appreciate (as is written in the introduction to the chapter) that you cannot be asked for calculations on portfolio theory but you are expected to understand the idea. The lecture and chapter show calculations because that makes it easier to understand, but you will not have to do them in the exam.

The notes are all up to date, but some of the chapter numbers against the lectures are wrong. I will have it corrected, but in the meantime you can tell from the title of the lecture which chapter of the lectures notes it is.

There is no lecture on the Macauley duration. I will record one when I have the time.

Thank you for taking the time. Gearing up for the repeats in sept . First time using this resource . Have to say it’s great . Please keep up the good work.

Thanks.
What you might find useful as well is that under the heading ‘revision kit live’ on the main P4 page, there are lectures working through three recent question 1’s from past papers (and I will add the one from June soon also).
It might be helpful for you with regard to the approach as well as the actual technical content.

Dear John Moffat,
I would like to thank you for all the lectures and state that your notes and lectures are valuable.
Could you please advise if you had time to upload lectures for Chapter 8 “Valuation of Finance, and the Macaulay duration and the modified duration”?
Thank you in advance with best regards

Its a measure of the riskiness – the greater the figure the more risky.

However do appreciate (as it says in the lecture notes) that these calculations can no longer be asked in the exam. You are only expected to understand the idea of portfolio theory without calculations.

I have left the lectures because I think the idea makes more sense if you have seen a few numbers.

Hi you say in this lecture the formula for combining investments is given in the exam but I don’t see it on the past papers I have – is this no longer the case?

It is no longer the case. The reason is that (as you will have read in the Lecture Notes that go with the lecture) the examiner has said that he will no longer ask for calculations on portfolio theory.

The only reason that I have left the lecture in, is that he has said that he does expect you to understand the ideas in portfolio theory. I think the best way of understanding is to see the examples, even though (again) you will not be expected to do calculations in the exams.

As it says in the Lecture Notes that go with the lectures, you are expected to understand and explain portfolio theory but you will not be asked calculations. The calculations are in the lecture just to make sense of the discussion.

( We do not have lectures on this website that are not relevant to the next exam )

Ooops – I mistyped my previous reply (and I have now corrected it!!!)

All our lectures for all papers are relevant for the next exams (otherwise we would remove them) and where relevant we add more lectures (as I have done recently for P4).

If i were to rank a list of my best lecturers in my entire study course, i will definitely list Mr John Moffat the top, the video lecturers are straight to the point and simplified that it makes it easier for understanding. I really appreciate the entire team of open tuition taking all the effort,time and commitment to give this kind of opportunity free of charge accessible to any students globally.

Yes it is possible. The example is simply to show that is is possible to mix two investments and end up with lower risk than either (but that is not always going to be the case 🙂 )

Do remember that you can not be asked portfolio calculations – you can only be asked to explain the principles. I only go through the examples to (hopefully) make the idea more clear.

If you read the last paragraph of the introduction to the chapter in the Course Notes, I make it clear that you are now only expected to know the principles involved and will not be required to use the formulae.
As I explain in the note, I have left the examples in the notes just to help make the principles clear.

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 🙂

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)

Minu says

Hiya when the valuation of debt & Macaulay duration videos will be recorded¿ thanks

John Moffat says

There are Paper F9 lectures on the valuation of debt (because that is revision from F9).

I wil try to find time to record a lecture on the duration soon.

sohail says

Hi,

What I understood, the more the possible returns on two investments are -vely correlated the more likely the overall reduction in risk. Is it true?

If it is true, then if they are +vely correlated what still cause the reduction in overall risk?

Thanks in advance.

John Moffat says

You need to watch the remaining lectures on portfolio theory as well, because I explain that it is because the unsystematic risk is being reduced.

In practice investments are positively correlated due to the systematic risk, but it is by creating a portfolio that the unsystematic risk can be removed.

sohail says

Thanks. I did watch the remaining lectures and got the query solved.

Nasrullah says

within example 5 how did u calculate Proportion invested in each ivestment option that 80% and 20%?i need to know this please.

John Moffat says

I assume you have downloaded the lecture notes (otherwise there is no point in watching the lecture)?

Tha last line of the question says “the new investment will comprise 20% of his enlarged portfolio” (so the other 80% must be in the existing portfolio).

Do appreciate (as is written in the introduction to the chapter) that you cannot be asked for calculations on portfolio theory but you are expected to understand the idea. The lecture and chapter show calculations because that makes it easier to understand, but you will not have to do them in the exam.

Nasrullah says

i did download the course note and I am referring to it.and thanks for the info.

Isaac says

Hi

Chapter 8 on the lecture print out refers to Macaulay duration. Is the video for that lecture located elsewhere ?)

Regards

Isaac says

Hi

Chapter 8 in th notes refers to Macaulay duration and not portfolio theory.

Where can I find that lecture ? Or is the motes outdated

John Moffat says

The notes are all up to date, but some of the chapter numbers against the lectures are wrong. I will have it corrected, but in the meantime you can tell from the title of the lecture which chapter of the lectures notes it is.

There is no lecture on the Macauley duration. I will record one when I have the time.

Isaac says

Thank you for taking the time. Gearing up for the repeats in sept . First time using this resource . Have to say it’s great . Please keep up the good work.

John Moffat says

Thanks.

What you might find useful as well is that under the heading ‘revision kit live’ on the main P4 page, there are lectures working through three recent question 1’s from past papers (and I will add the one from June soon also).

It might be helpful for you with regard to the approach as well as the actual technical content.

susannadallakyan says

Dear John Moffat,

I would like to thank you for all the lectures and state that your notes and lectures are valuable.

Could you please advise if you had time to upload lectures for Chapter 8 “Valuation of Finance, and the Macaulay duration and the modified duration”?

Thank you in advance with best regards

John Moffat says

Sorry, but not yet.

anonymous says

Sir, what does that 4.08% mean? i have studied it in the past but never understood what it meant.

John Moffat says

Its a measure of the riskiness – the greater the figure the more risky.

However do appreciate (as it says in the lecture notes) that these calculations can no longer be asked in the exam. You are only expected to understand the idea of portfolio theory without calculations.

I have left the lectures because I think the idea makes more sense if you have seen a few numbers.

anonymous says

Ok I get that. Thank you very much. Examples are useful for understanding the concept and I appreciate that. Thank you again.

Karen says

Hi you say in this lecture the formula for combining investments is given in the exam but I don’t see it on the past papers I have – is this no longer the case?

John Moffat says

It is no longer the case. The reason is that (as you will have read in the Lecture Notes that go with the lecture) the examiner has said that he will no longer ask for calculations on portfolio theory.

The only reason that I have left the lecture in, is that he has said that he does expect you to understand the ideas in portfolio theory. I think the best way of understanding is to see the examples, even though (again) you will not be expected to do calculations in the exams.

denisehenwood says

thank you

Angela says

Is this lecture still relevant to Jun 2015 exam?

John Moffat says

As it says in the Lecture Notes that go with the lectures, you are expected to understand and explain portfolio theory but you will not be asked calculations. The calculations are in the lecture just to make sense of the discussion.

( We do not have lectures on this website that are not relevant to the next exam )

Angela says

If so, may I know the lectures that are irrelevant to Jun 2015 exam? Thank you so much for your reply.

John Moffat says

Ooops – I mistyped my previous reply (and I have now corrected it!!!)

All our lectures for all papers are relevant for the next exams (otherwise we would remove them) and where relevant we add more lectures (as I have done recently for P4).

sogan0 says

nice lecture

SOUD SAEED says

If i were to rank a list of my best lecturers in my entire study course, i will definitely list Mr John Moffat the top, the video lecturers are straight to the point and simplified that it makes it easier for understanding. I really appreciate the entire team of open tuition taking all the effort,time and commitment to give this kind of opportunity free of charge accessible to any students globally.

John Moffat says

Thank you very much for your comments 🙂

puiling says

Is it possible when adding new investment giving rise to higher risk?

John Moffat says

Yes it is possible. The example is simply to show that is is possible to mix two investments and end up with lower risk than either (but that is not always going to be the case 🙂 )

Do remember that you can not be asked portfolio calculations – you can only be asked to explain the principles. I only go through the examples to (hopefully) make the idea more clear.

puiling says

Thanks =)

roomilaangel says

How to download these lectures?? plz help

John Moffat says

You can not download the lectures – you can only watch them online.

Only the course notes can be downloaded.

It is the only way that we can keep this website free of charge.

akee says

This is a technical paper, but manageable if we thoroughly practice the past papers after completion of course

aneskia says

last paper, lots of unforeseen events and 20days to my credit! Can i do this/

John Moffat says

Yes you can 🙂

(Since you are on portfolio theory, do appreciate that you will no longer be asked calculations but you can be expected to understand/explain)

jaleah says

Hi , I am unable to view your lectures. I keep getting the message server not found. any advice on what i should do? Thanks

admin says

use google chrome please

htung00 says

I no longer see the asset portfolio formulae on the formulae sheet. Was this section removed?

John Moffat says

If you read the last paragraph of the introduction to the chapter in the Course Notes, I make it clear that you are now only expected to know the principles involved and will not be required to use the formulae.

As I explain in the note, I have left the examples in the notes just to help make the principles clear.

dickroy1962 says

I am fairly comfortable with P4

chantel says

i am comforted in the knowledge that i’m not the only one struggling with this paper p4…….. my final paper!

nyachatonda says

I need to pass P4 no matter what

p4nitemare says

me too. i am tired of this paper and am doing everything i can to pass it once and for all. it has been a nightmare to me.