Page 315 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes One such model is the multi-factor model.
There are different variants of this model and each of them is developed to capture some
of the non-market influences that cause shares to move together (recall that single-index
model accounts for only market-related influences).
The non-market influences, in essence, include a set of economic factors or industry (or
group) characteristics that account for common movement in share prices.
While it is easy to find a set of indices that are associated with non-market effects over any
period of time, it is quite another matter to find a set that is successful in predicting co-
variances that are not market related.
There is still a great deal of work to be done before multi-index models consistently
outperform the simpler one.

12.6 Keywords

Beta: The beta ( ) of a stock or portfolio is a number describing the relation of its returns with
that of the financial market as a whole.
Efficient Frontier: A line created from the risk-reward graph, comprised of optimal portfolios.
Portfolio Manager: The person or persons responsible for investing a mutual, exchange-traded
or closed-end fund’s assets, implementing its investment strategy and managing the day-to-day
portfolio trading.

12.7 Self Assessment

Fill in the blanks:
1. .................................... models are used to construct portfolios with certain characteristics,
such as risk, or to track indexes.

2. ............................. measures the additional return investors have historically received by
investing in stocks of companies with relatively small market capitalization.
3. The return of any stock portfolio can be explained almost entirely by two factors:
............................ and ...............................
4. ...................................... is a common factor, so it does not appear on the graph.
5. ............................ is credited with developing the first modern portfolio analysis model.

6. A portfolio is efficient when it is expected to yield the ......................................return for the
level of risk accepted.
7. The ..................................is a boundary of the attainable set.

8. Markowitz considered the .................................. in the expected returns from investments
and their relationship to each other in constructing portfolios.
9. Beta is a primary feature of any .................................. factor model.

10. .................................. are also very interested in what the beta of a portfolio (or security)
will be in the future, or what the realized beta will be.
11. The regression coefficient (Beta) indicates the manner in which a security’s return changes
systematically with the changes in market, this linear line is also called ................

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