WEALTH PRESENTATION
http:/www.smh.com.au/business/banks-keep-home-loan-standards-tight-2012081023z38.html
PART 1
The significance of the article:
The article discusses the banks tightening on home loan standards. It details the changing
availability of hi
The risk of a complete portfolio
We figured out in the last lecture how to calculate
the variance of a two asset portfolio:
rC = (1 y )rf + yrP
[
Var (rC ) = Var (1 y )rf + yrP
]
Var (rC ) = (1 y ) Var (rf ) + y 2Var (rP ) + 2(1 y ) yCov(rf , rP )
2
The
Step 1: Choosing P* (and implicitly the
CAL)
The CAL is a line in risk-return space
Its slope, S, determines how much reward in terms of
E(r) we get for taking on one more unit of risk
We can easily calculate this slope from our two known
points on the
Step 2: Choosing the risky share, y
Once we have determined P*, we know from
before that our risk and return will be:
[
E (rC ) = rf + y E (rP ) rf
]
C = y P
We also know that our utility will depend on
these quantities in the following manner:
U = E (
Apply the mean variance criterion
A different way to phrase this is to note that we only consider risky portfolios on the efficient
frontier
We can then forget about the efficient frontier and only compare CALs
We note that for any portfolio on CAL1 there
Borrowing constraints
In practice, we must borrow at a higher rate
than we can invest at
This is because lending money to us is not
really risk free
Graphically we get a kink in the CAL when y =
1
Since wed have higher default risks for more
leveraged
The variance of the market portfolio
We calculate the variance just like any other
portfolio variance, i.e. by setting up the
covariance matrix and summing the elements:
w1r1
w2r2
wNrN
w 1r1
Cov(w1r1,w1r1)
Cov(w1r1,w2r2)
Cov(w1r1,wNrN)
w2 r 2
wNrN
Cov(w2
The risk-return ratio of the market
portfolio
Since the market portfolio is the portfolio with
the best risk-return ratio, it cannot be
improved by changing the portfolio weights
This means that no isolated investment can
make a larger contribution to t
Lets plot it
Last lecture, we learned only to consider risky
portfolios on the efficient frontier, so lets
chose P from that set
E(r)
P
CALP
rf
Apply the mean variance criterion
We see that some of our complete portfolios
dominate some portfolios on the
Lecture 4
Markowitz portfolio theory
Learning outcomes
After this lecture you should:
Be familiar with the concepts of preferences and utility
Understand how preferences are represented by utility functions in
economic theory
Know how and when to appl
Portfolios
A portfolio is a group of assets that we hold at the same
time. Recall the bond portfolios from lecture 3.
The portfolio return, rP, is a weighted average of the returns
of the assets that make up the portfolio:
N
rP w1r1 w2 r2 . wN rN wi ri
Covariance
The covariance of two variables express their tendency
to be higher or lower than their respective mean
values at the same time:
Cov( X , Y ) E X EX Y EY
The variance of a variable is simply its covariance with
itself :
2
Var ( X ) E X E X
Risk aversion
This is a central concept in finance
It means that we prefer certain outcomes to
stochastic ones
To induce risk averse investors to nevertheless
take on risk, we need to give them an
incentive a risk premium
The liquidity premium we disc
The covariance matrix for two assets
Suppose we have formed a portfolio with some
fraction wA invested in asset A and some fraction wB
= (1-wA) invested in asset B
Our (stochastic) portfolio return is rP wArA wB rB
We are interested in Var r Covr , r C
So what portfolio should we pick?
By combining the assets in different
proportions we can construct portfolios with
new risk-return profiles below the red line:
E(r)
So what portfolio should we pick?
By our mean-variance criteria we can see that
some po
Diversification
For lower values of the portfolio standard
deviation must be lower.
E(r)
B
A
Diversification
The combination of two or more less than
perfectly correlated assets in one portfolio is
called diversification, and the risk reduction is
calle
Numerical example
Set up the covariance matrix:
wArA
rX
wBrB
wXrX
Cov(wArA,rX)
Cov(wBrB,rX)
Cov(wXrX,rX)
Calculate each element:
CovwA rA , rX wACovrA , rX wA A, X A X 0.25 0.5 20 25 62.5
CovwB rB , rX wB CovrB , rX wB B , X B X 0.5 0.6 25 25 187.5
2
Co
Introduce a risk free asset
Suppose that in addition to the risky assets that
we talked about last lecture, we could also invest
in some risk free asset
Well call the return of this asset the risk free
return, rf
By definition of risk free, we have Var
Lecture 5
Optimal portfolios
Learning outcomes
By the end of this lecture you should:
Be familiar with the separation theorem
Know why this implies that every investors
optimal risky portfolio is the market portfolio
Be able to solve the portfolio pro
Statements of Advice must be clear,
concise and effective
The Corporations Act 2001 generally requires financial services providers
(FSPs) to give a Statement of Advice (SOA) to retail clients who receive
personal financial advice.1 This requirement is de
How Do You Measure Success And
Quality In A Financial Planning
Firm?
December 2, 2013 07:01 am 7 Comments CATEGORY: Practice
Management
Executive Summary
Over the past decade, it has become increasingly popular for
publications to cite the assets-under-ma
Chapter 01 Effective statements of
advice
What is a statement of advice, or SOA?
From an advisers point of view a statement of advice or SOA is a written
explanation of the advisers advice to a client. It explains and records the
advice, the reasons for t
EXAMPLE ONLY
1 March 2014
Private & Confidential
Mr Max Stats & Ms Min Stats
1 Distribution St
SYDNEY NSW 2000
Dear Max & Min
It was a pleasure to meet with you to discuss your current position and the goals and
objectives you hope to achieve.
Enclosed is
REPORT 18
Survey on the quality of
financial planning advice
February 2003
ASIC/ACA SURVEY ON THE QUALITY OF FINANCIAL PLANNING ADVICE
What this research report is about
This research report:
describes the 2003 survey on the quality of advice by financia
REGULATORY GUIDE 244
Giving information, general
advice and scaled advice
December 2012
About this guide
This guide is for Australian financial services (AFS) licensees, authorised
representatives and advice providers who give information and advice to
re
Lecture 6
The CAPM
Learning outcomes
By the end of this lecture you should:
Be able to interpret and apply the CAPM, both for
individual assets and portfolios
Know what the assumptions of the CAPM is why
they are relevant
Know how to partition the ris
Two special cases of the CAPM
For the market portfolio M itself, the CAPM
simplifies to:
Cov (r , r )
E (rM ) = r f +
M
M
2
M
[E (r ) r ]
M
f
2
M
E (rM ) = r f + 2 [E (rM ) r f ] = r f + E (rM ) rf
M
E (rM ) = E (rM )
For the risk free asset the CAPM si
Quick recap
The relevant properties of our combined
portfolio is its risk and expected return
If we combine several assets, some risk may
be diversified away
How much of an assets risk can be diversified
away and how much cannot depends on its
covarian
Unsystematic risk
2
i2 = i2 M + 2
The second term in the expression is called
unsystematic risk or idiosyncratic risk
The unsystematic risk is the part of an assets
risk that is particular to the asset itself
Since this risk comes from sources that do
The Security Market Line
We can illustrate this in a graph similar to the CAL
Each asset is compensated with excess return in relation to its risk in the
market portfolio
We often denote the risk ratio in the CAPM with i
According to the CAPM, all assets