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    SAPM (1) (1)

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    SAPM (1) (1)

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    0 views4 pages

    SAPM (1) (1)

    Uploaded by

    jain99591

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    S.

    S JAIN SUBODH MANAGEMENT INSTITUTE

    NAME: ASHISH KUMAR SINGHI

    CLASS : MBA 3 SEM

    SUBJECT : Security Analysis & Portfolio Management

    SUBJECT CODE : M-310

    ROLL NO: 13

    SUBMITTED TO :

    DR. SUPRIYA AGARWAL

    ASS. PROF.
    Markowitz's approach:
    Markowitz's approach refers to Harry Markowitz's Modern Portfolio Theory (MPT), which
    he introduced in his seminal 1952 paper, "Portfolio Selection." This theory fundamentally
    changed the way people think about investment portfolios and risk management.

    Markowitz's Approach, Sharpe Single Index Model, and Treynor Approach:

    A Comparative Analysis

    These three approaches are fundamental in portfolio theory, each offering a unique perspective
    on portfolio construction and evaluation.

    Markowitz's Approach (Mean-Variance Analysis)

     Core Concept: This approach focuses on constructing portfolios that maximize


    expected return for a given level of risk, or minimize risk for a given level of expected
    return.

     Key Considerations:
    o Expected Return: The anticipated return of a security or portfolio.
    o Variance (Risk): The dispersion of returns from the expected return.
    o Covariance: The measure of how two securities move together.
     Process:
    o Estimate expected returns and covariance matrix for all securities.
    o Calculate efficient frontier, a curve representing the set of portfolios that offer
    the highest expected return for a given level of risk.
    o Select the optimal portfolio based on investor's risk tolerance.

    Sharpe Single Index Model

     Core Concept: This model simplifies portfolio analysis by assuming that the return of
    a security is influenced by both a market factor (systematic risk) and a security-specific
    factor (idiosyncratic risk).
     Key Considerations:
    o Market Index: A representative index of the overall market.
    o Beta: A measure of a security's systematic risk relative to the market index.
    o Alpha: A measure of a security's excess return over its expected return based
    on its beta.

     Process:
    o Estimate the beta of each security.
    o Calculate the expected return of each security using the Capital Asset
    Pricing Model (CAPM).
    o Construct the optimal portfolio by selecting securities with the highest alpha.

    Treynor Ratio

     Core Concept: This ratio measures a portfolio's risk-adjusted performance by


    dividing its excess return by its beta.
     Key Considerations:
    o Excess Return: The return of the portfolio minus the risk-free rate.
    o Beta: A measure of the portfolio's systematic risk.
     Process:
    o Calculate the Treynor ratio for each portfolio.
    o Select the portfolio with the highest Treynor ratio.
    Key Differences and Applications

    Markowitz's Sharpe Single Index


    Feature Treynor Ratio
    Approach Model
    Portfolio Simplifying portfolio Evaluating portfolio
    Focus diversification and analysis and identifying performance relative to
    risk-return trade-off undervalued securities systematic risk
    Requires estimation of Requires estimation of
    Relatively simple
    Complexity a full covariance betas and market index
    calculation
    matrix returns
    Historical returns for all Historical returns for the
    Data Historical returns for
    securities and a market portfolio and the risk-free
    Requirements all securities
    index rate
    Constructing optimal Identifying undervalued Evaluating portfolio
    Application portfolios, asset securities, portfolio performance, comparing
    allocation management different portfolios

    Conclusion:

    While Markowitz's approach provides a comprehensive framework for portfolio optimization,


    the Sharpe Single Index Model and Treynor Ratio offer more simplified and efficient methods.
    The choice of approach depends on the investor's specific needs, data availability, and
    computational resources.

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