beta
Syn: beta coefficient . A measure of the variability of rate of return (or rarely, price) of a stock or portfolio compared to that of the overall market.
dictionary.com version
Also called beta coefficient, beta line. Stock Exchange. an arbitrary measure of the volatility of a given stock using an index of the volatility of the market as a whole: A beta of 1.1 indicates a stock that is 10 percent more volatile than the market.
Investopedia.com version
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
Also known as “beta coefficient”.
Beta is calculated using regression analysis, and you can think of beta as the tendency of a security’s returns to respond to swings in the market. A beta of 1 indicates that the security’s price will move with the market. A beta less than 1 means that the security will be less volatile than the market. A beta greater than 1 indicates that the security’s price will be more volatile than the market. For example, if a stock’s beta is 1.2, it’s theoretically 20% more volatile than the market.
Many utilities stocks have a beta of less than 1. Conversely, most hi-tech Nasdaq-based stocks have a beta greater than 1, offering the possibility of a higher rate of return but also posing more risk.
basis point
A basis point correspond to 1/100 of a percentage point.
Investopedia.com version
Basis Point – BPS
A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security.
The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and 0.01% = 1 basis point.
So, a bond whose yield increases from 5% to 5.5% is said to increase by 50 basis points; or interest rates that have risen 1% are said to have increased by 100 basis points.
arbitrage
Profiting from differences in price when the same security, currency, or commodity is traded on two or more markets.
Dictionary. com version
The simultaneous purchase and sale of the same securities, commodities, or foreign exchange in different markets to profit from unequal prices.
American Heritage Dictionary
The purchase of securities on one market for immediate resale on another market in order to profit from a price discrepancy.
annuity
investment that generates constant cash flows for a limited period of time
American Heritage Dictionary version
1. a. The annual payment of an allowance or income.
b. The right to receive this payment or the obligation to make this payment.
2. A contract or agreement by which one receives fixed payments on an investment for a lifetime or for a specified number of years.
amortization
depreciation allowance or repayment by periodical installments
dictionary.com version
amortization, reduction, liquidation, or satisfaction of a debt. The term amortization may also refer to the sum used for that purpose. The term is commonly used in ascertaining the investment value of securities. Thus, if a security is bought at more than its face value (i.e., at a premium), a part of the premium is periodically charged off in order to bring the value of the security to par at maturity; if the security is bought at less than its face value, the discount is similarly charged off. Paying off a mortgage or any other debt by installments or by a sinking fund is amortization. Amortization by paying off a certain number of bonds each year is practiced by public corporations. National governments of limited credit as well as private companies commonly amortize by sinking funds. Governments with stronger credit usually refund debts by issuing new bonds. The satisfying of a debt by a single payment may be termed amortization. Amortization of a fixed asset refers to the depreciation of a nonmaterial investment over its estimated average life.
Optimize Portfolio via CAPM
Written by Administrator 0f Bizfun.cc
Asset allocation with maximum return and minimum risk, theory published by William F. Sharpe (1964) named Capital Asset Pricing Model (CAPM). CAPM extended Harry Markowitz’s portfolio theory to introduce the notions of systematic and specific risk. For his work on CAPM, Sharpe shared the 1990 Nobel Prize in Economics with Harry Markowitz and Merton Miller.
CAPM considers a simplified world where:
There are no taxes or transaction costs.
All investors have identical investment horizons.
All investors have identical opinions about expected returns, volatilities and correlations of available investments.
Portfolio theory provides a broad context for understanding the interactions of systematic risk and reward. It has profoundly shaped how institutional portfolios are managed, and motivated the use of passive investment management techniques. The mathematics of portfolio theory is used extensively in financial risk management and was a theoretical precursor for today’s value-at-risk measures.
You can plan and optimize your portfolio allocation using CAPM at Myshareonline. It computes capital investment of $100,000 as market value and using Bursa’s stock “Beta†and current stock price to get Optimum Portfolio. It lists you the quantity of share allocation in order to achieve greater return with minimum risk.
The output is amazing with Risk/Reward graph presented. For best result, you are recommended to enter at least six counters but two are acceptable to let the program run. The portfolio risk/reward in blue square on graph is what you are looking for. I run several tests with result of risk valuing from 1%-3% vs. reward of around 10% and more. In practical, you may hold your position to maximize profit if trend intact.
Glossary
Sharpe, William F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk, Journal of Finance, 19 (3), 425-442.
Tobin, James (1958). Liquidity preference as behavior towards risk, The Review of Economic Studies, 25, 65-86.
Treynor, Jack (1961). Towards a theory of market value of risky assets, unpublished manuscript.
Beta describes the sensitivity of an instrument or portfolio to broad market movements. The stock market (represented by an index) is assigned a beta of 1.0. By comparison, a portfolio (or instrument) which has a beta of 0.5 will tend to participate in broad market moves, but only half as much as the market overall. A portfolio (or instrument) with a beta of 2.0 will tend to benefit or suffer from broad market moves twice as much as the market overall.