Asset allocation with maximum return and minimum risk, theory published by William F. Sharpe (1964) named Capital Asset Pricing Model (CAPM). CAPM extended Harry Markowitz's portfolio theory to introduce the notions of systematic and specific risk. For his work on CAPM, Sharpe shared the 1990 Nobel Prize in Economics with Harry Markowitz and Merton Miller.
CAPM considers a simplified world where:
- There are no taxes or transaction costs.
- All investors have identical investment horizons.
- All investors have identical opinions about expected returns, volatilities and correlations of available investments.
Portfolio theory provides a broad context for understanding the interactions of systematic risk and reward. It has profoundly shaped how institutional portfolios are managed, and motivated the use of passive investment management techniques. The mathematics of portfolio theory is used extensively in financial risk management and was a theoretical precursor for today's value-at-risk measures.
You can plan and optimize your portfolio allocation using CAPM at Myshareonline. It computes capital investment of $100,000 as market value and using Bursa’s stock “Beta” and current stock price to get Optimum Portfolio. It lists you the quantity of share allocation in order to achieve greater return with minimum risk.
The output is amazing with Risk/Reward graph presented. For best result, you are recommended to enter at least six counters but two are acceptable to let the program run. The portfolio risk/reward in blue square on graph is what you are looking for. I run several tests with result of risk valuing from 1%-3% vs. reward of around 10% and more. In practical, you may hold your position to maximize profit if trend intact.
Glossary
Sharpe, William F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk, Journal of Finance, 19 (3), 425-442.
Tobin, James (1958). Liquidity preference as behavior towards risk, The Review of Economic Studies, 25, 65-86.
Treynor, Jack (1961). Towards a theory of market value of risky assets, unpublished manuscript.
Beta describes the sensitivity of an instrument or portfolio to broad market movements. The stock market (represented by an index) is assigned a beta of 1.0. By comparison, a portfolio (or instrument) which has a beta of 0.5 will tend to participate in broad market moves, but only half as much as the market overall. A portfolio (or instrument) with a beta of 2.0 will tend to benefit or suffer from broad market moves twice as much as the market overall.
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