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The modern portfolio theory

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  1. Introduction.
  2. The balance between the risk and the potential return.
    1. The variance as a major tool.
    2. The Markowitz theory.
  3. Tha analysis of the price of an asset.
    1. Evaluation of the risk.
    2. Capital asset pricing model.
  4. Active vs passive investing.
  5. Technical/fundamental analysis.
  6. Stocktrak as an application of the theory.
  7. References.

The aim of the Modern Portfolio Theory is to provide to a portfolio owner the tools necessary to implement an efficient and sustainable strategy focusing on minimizing the risk. According to this theory, risk is supposed to be reduced through the choice of a diversified portfolio. In fact, enlarging the scope of investments on a large range of market allows for the reducing of the risk by being less dependent of a single value. In addition, the application of the theory allows the trader to determine the value of an asset comparing the potential return with the risk. Several theories have been established to determine this value and the following paper will focus on the followings, Markowitz and the capital asset model, which are considered to be the most efficient. An efficient trading strategy doesn't mean to take major risk in order to get high return, it appears crucial to reduce the risk as much as possible in order to benefit from a sustainable growth of the portfolio's value. Regarding the Modern Portfolio Theory, the first key point to analyze appears to be the relationship between the risk and the potential return.

[...] In this way the methodology to use is to quantify the risk through coefficient. This has to be done with the key coefficient alpha and beta. The coefficient beta measures the volatility of an asset. The coefficient alpha is part of the risk of an investment. These coefficients allow the determination of the Security Characteristic Line (SCL) which is a straight line representing the relationship between the market return and the return of a given asset at a given time t. [...]


[...] Our main expectation was the clarification of the situation of Google. Regarding the evolution we were very satisfied about it because we made more than 30 000$ only on Google. conclusion REGARDING OUR STRATEGY, WE BOTH INVESTED ACTIVELY AND PASSIVELY. AS REGARDS TO THE DEFINITION, WE INVESTED PASSIVELY IN ASSET CLASSES CONSIDERED TO BE VERY EFFICIENT, AND WE INVESTED ACTIVELY IN ASSET CLASSES CONSIDERED TO BE LESS EFFICIENT. IN ADDITION, THROUGH THE STOCKTRAK, WE HAD THE OPPORTUNITY TO USE TECHNICAL AND FUNDAMENTAL ANALYSIS. [...]


[...] Stocktrak as an application of the theory As we saw during the seminar, the first important thing is to analyze historical fundamental data like company financial statements, economic data, company's order book, etc. (things that cause earnings to change) and historical technical data like historical price data (analyses the effect of changes in earnings. To understand the capital markets, we can use several industry tools like the moving average tool (when things are changing form the norms), MDCD (trends getting stronger or weaker, signal on the cross), momentum (measures buying or selling pressure) and stochastic (buying extreme, identify overbought or oversold markets). [...]

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