Jacky S. Lee’s Post

Decoding the Capital Asset Pricing Model (CAPM) Understanding the risk and return profile of investments is crucial in finance. The Capital Asset Pricing Model (CAPM) stands out as a robust tool that links expected returns with market risk. #FinanceBasics The CAPM equation is: Expected Return= Risk−Free Rate+Beta∗(Market Return−Risk−Free Rate) #InvestmentInsights Risk-Free Rate: The return on a riskless asset, usually government bonds. Beta: A measure of how much risk the investment carries compared to the market. Market Return: The average return of the market. #RiskManagement This model assists investors in estimating the return on an asset while accounting for its risk level compared to the overall market. #PortfolioOptimization CAPM is pivotal for: - Deriving the expected return on assets. - Informing decisions on asset addition or removal from portfolios. #FinancialModelling Despite its simplicity and utility, CAPM's limitations lie in its assumptions like market efficiency and a single-factor view of risk, which can oversimplify real-world complexities. #CAPM #AssetPricing #FinancialMarkets #RiskAndReturn #ModernFinance

Capital Asset Pricing Model (CAPM) :📊✨ 1️⃣ What is CAPM? The Capital Asset Pricing Model (CAPM) is a financial model that describes the relationship between investment risk and expected return. It is widely used to estimate the cost of equity and expected risks of investment assets. 2️⃣ Basic Principles: CAPM assumes that investors demand a higher return for taking on more risk. The model quantifies the expected return on an investment based on its non-diversifiable risk, known as market risk or "beta." 3️⃣ the CAPM Equation: Expected Return = Risk-Free Rate + Beta × (Market Expected Return - Risk-Free Rate) - Risk-Free Rate: Typically, government bonds are used as a benchmark. - Beta: A measure of an asset's volatility compared to the market. - Market Expected Return: The overall expected return of the market. 4️⃣ Importance of Beta: - Beta > 1: The asset is more volatile than the market. - Beta < 1: The asset is less volatile. - Beta = 1: The asset's volatility matches the market. 5️⃣ Applications of CAPM: Analysts and investors use CAPM to determine whether an asset is a good investment based on expected risks and returns. It also helps in determining the cost of capital for companies. #CAPM #FinancialAnalysis #RiskManagement #Investing #InvestmentValuation #EconomicAnalysis #Finance #EquityAnalysis #InvestmentStrategy #FinancialModeling

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Asset Planning: Illiquid Asset Cashflow Forecasting and Stress Testing -outstanding research by Ali Hirsa, Federico Klinkert, Satyan Malhotra "This paper is part of our effort to push for a structured Asset Planning approach across all assets. This is especially important for Institutional investors as they perform their fiduciary duties to manage assets across the investment life cycle. We have developed and applied many new financial models specifically for illiquid assets so there are choices to fit the asset or fund nuances/features, extended traditional liquid asset stress tests to illiquid assets (for uniform stress testing across the portfolio), and also shown how Explainability Index can be used for simpler relative assessments to explain performance." Link to the paper: https://lnkd.in/eMSDMPmf Ali Hirsa -- this graph is a work of art!

Understanding the Intricacies of the Modified Dietz Method In today's financial world, where precision and accuracy are paramount, understanding the methodologies behind investment performance measurement is crucial. One such method that often garners attention and debate is the Modified Dietz Method. What is the Modified Dietz Method? The Modified Dietz Method is a formula used to calculate the performance of an investment portfolio over a specific period. It takes into account cash flows in and out of the portfolio, making it suitable for measuring the performance of actively managed portfolios. The Intricacies of the Modified Dietz Method: While the Modified Dietz Method is widely used, it's not without its challenges. Here are some key intricacies to be aware of: Timing of Cash Flows: The method assumes that cash flows occur at regular intervals throughout the measurement period. However, irregular or poorly timed cash flows can distort the calculated return. Weighting of Cash Flows: The method calculates the weighted average time of cash flows, which can lead to discrepancies if cash flows are significant and occur at different times during the measurement period. Implicit Assumptions: Like any performance measurement method, the Modified Dietz Method relies on certain assumptions, such as the timing and magnitude of cash flows. Deviations from these assumptions can impact the accuracy of the calculated return. Sensitivity to Period Length: The method's sensitivity to the length of the measurement period can lead to different performance results for the same portfolio, depending on the chosen time frame. Mitigating the Challenges: While the challenges of the Modified Dietz Method are significant, they can be mitigated through careful portfolio management and analysis: Regular Monitoring: Regularly monitoring cash flows and ensuring they align with the assumptions of the method can help reduce distortions in performance measurement. Consistent Reporting: Consistency in reporting methodologies and measurement periods can enhance comparability and reliability of performance results. Supplementary Analysis: Utilizing additional performance measurement methods alongside the Modified Dietz Method can provide a more comprehensive understanding of portfolio performance. Conclusion: The Modified Dietz Method remains a valuable tool for measuring investment performance, particularly in the context of actively managed portfolios with frequent cash flows. While it has its challenges, understanding its intricacies and implementing appropriate mitigation strategies can help ensure more accurate performance measurement. Follow ROSHAAN MAHBUBANI for more insights and discussions on investment methodologies and best practices. #InvestmentManagement #PortfolioPerformance #PortfolioManagement #CashFlowManagement #RiskManagement #InvestmentHoldingPeriod

How to determine optimum portfolio: There are few aspects to consider to determine optimum portfolio. When you look at the graph, Risk(X-axis)-Return(Y-axis) graph, you can see two type of curves 1) Upwards sloping IC curve 2) Downward sloping efficient frontier(Markovitz's) IC curve or Indifference curve is upwards sloping because for every incremental risk you take you want extra high return, hence upward sloping. Efficient frontier which is calculated using Markovitz's var-covar matrix provide highest return for that given risk. 💡 To understand how to create efficient portfolio refer to this link: https://lnkd.in/dzdPtyaM Now the question is how is IC curve calculated. The answer is through utility function. 💡 To understand utility function refer to this link: https://lnkd.in/d9sCPHNe And how to determine optimum portfolio, where these two curves becomes tangent to each other that point is the optimum portfolio for that investor. 👉 This is what portfolio manager does while creating portfolios, and now you also know it. Create your own portfolios and become your own portfolio managers. P.S: I haven't discuss about the implication of Risk free rate here. That will be in subsequent posts. #finance #portfoliomanagement #investment

With increasing capital dedicated to illiquid private market strategies combined with today’s growing complexity of portfolios and market uncertainties, many institutional investors face difficulty planning future liquidity and managing increased risk management regulatory requirements. CEPRES Predictive Intelligence enables investors to easily analyze existing, or plan complex new, portfolios by running stochastic forecasts on cash flows and stress testing portfolio compositions to optimize asset allocations for any market condition 📊 Visit our website to find out how we can transform your portfolio forecasting: https://lnkd.in/e_iBdfPp #predictiveintelligence #funddevelopments #portfolioforecasting

The allocation and management of private capital is increasingly dependent on efficient data flows between asset allocators, managers and portfolio companies. However, the tools available to collect, analyze and report on the continually expanding list of performance factors relevant to private market investing have not kept pace. Introducing the Alternatives Risk Assessment Platform, a comprehensive portfolio monitoring and diligence solution for asset allocators and managers. Learn more and book a demo: https://lnkd.in/gDhCY9Gx

𝟱𝟬 𝗩𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻 𝗧𝗲𝗿𝗺𝘀 𝘀𝗵𝗼𝗿𝘁𝗹𝘆 𝗲𝘅𝗽𝗹𝗮𝗶𝗻𝗲𝗱: P/E Ratio (Price-to-Earnings Ratio) CAPM (Capital Asset Pricing Model) Comparable transactions method Comparable companies method Return on Invested Capital Relief from royalty method Replacement cost method Dividend discount model Marketability discount Economic Value Added Gordon growth model Equity risk premium Value of synergies Relative valuation Earnings per share Leveraged Buyout Enterprise value Value investing Market approach Income approach Control premium Unlevered Beta Terminal value Risk-free rate Free cash flow Cost of equity Cost approach Risk premium Equity value Book value Size risk WACC DCF NPV IRR 👇 ✅ Want to learn valuation? Join 𝗙𝗥𝗘𝗘 𝘄𝗲𝗯𝗶𝗻𝗮𝗿 at 18th of April: REGISTER HERE: https://lnkd.in/dztAKCM9