You were a great resource while I was in university, thank you! I had forgot about this channel, will definitely come back to brush up on some concepts 👍
If you watch to the end, you will see the mapping. Where ER(M) is the market's excess return, and because *β(p, M) = σ(M)*σ(P)*ρ(p,M)/σ^2(M)* , we can express the *SML->CAPM* as given by *E(r) = Rf + [ER(M)*/σ(M)] * σ(p)*ρ(p,M)* . Portfolios on the most-efficient (straight line) CML are _special cases_ of this SML where ρ(p,M) = 1.0; i.e., truly well-diversified portfolios. Any _single point_ (portfolio) on the SML maps to _multiple points_ (portfolios) on the left-hand μ-versus-σ space. Equivalently, _multiple points_ on the same horizontal line in the CML space map to the same _single point_ on the SML line, but among them only the CML point has a perfect ρ(p,M) = 1.0 which is the meaning, in this context, of well-diversified. Hence the meaning of my title: the SML includes the most-efficient CML (as a specific case) but generalizes to inefficient portfolios as well. We can quantify the implied *correlation-volatility tradeoff* , in my example (I am rounding now), at 150% leverage: on the CML where ρ(p,M) = 1.0 per CML the E(r) = Rf + [ER(M)*/σ(M)] * σ(p) = 6.0% + (6.59%/11.68%) * 17.51% = 15.89%. The less efficient portfolio has a ρ'(p',M) = 0.89 with implied volatility of 17.51%/0.89 = 19.68%. That's the tradeoff: lower correlation --> higher volatility. It has the same beta of 1.50 and therefore the same E(r) under the SML. Further, we can reverse out its implied specific risk which is given by SQRT(19.68%^2 - 1.50^2 * 11.68%^2) = 8.98% (rounds to 9.0% in my video). Cool, right?
Hi I’m final year student in Varsity and completing financial Management. I was hoping know to where can I get these spreadsheets or excels sheets for practical practice
How is it possible for a maximally diversified portfolio, i.e., with correlation = 1, to not actually BE the market portfolio?? What would be an example of this?
Sir, thank you is not even enough. I am hoping to land a job in risk and first pay check I'll buy your full frm package including those immaculate spreadsheet descriptions. The practicality is pure genius and to have been doing it since 08' on RUclips is quite impressive. Thank you so so much!
You were a great resource while I was in university, thank you! I had forgot about this channel, will definitely come back to brush up on some concepts 👍
Thank you for the support, please do come back!
If you watch to the end, you will see the mapping. Where ER(M) is the market's excess return, and because *β(p, M) = σ(M)*σ(P)*ρ(p,M)/σ^2(M)* , we can express the *SML->CAPM* as given by *E(r) = Rf + [ER(M)*/σ(M)] * σ(p)*ρ(p,M)* . Portfolios on the most-efficient (straight line) CML are _special cases_ of this SML where ρ(p,M) = 1.0; i.e., truly well-diversified portfolios. Any _single point_ (portfolio) on the SML maps to _multiple points_ (portfolios) on the left-hand μ-versus-σ space. Equivalently, _multiple points_ on the same horizontal line in the CML space map to the same _single point_ on the SML line, but among them only the CML point has a perfect ρ(p,M) = 1.0 which is the meaning, in this context, of well-diversified. Hence the meaning of my title: the SML includes the most-efficient CML (as a specific case) but generalizes to inefficient portfolios as well.
We can quantify the implied *correlation-volatility tradeoff* , in my example (I am rounding now), at 150% leverage: on the CML where ρ(p,M) = 1.0 per CML the E(r) = Rf + [ER(M)*/σ(M)] * σ(p) = 6.0% + (6.59%/11.68%) * 17.51% = 15.89%. The less efficient portfolio has a ρ'(p',M) = 0.89 with implied volatility of 17.51%/0.89 = 19.68%. That's the tradeoff: lower correlation --> higher volatility. It has the same beta of 1.50 and therefore the same E(r) under the SML. Further, we can reverse out its implied specific risk which is given by SQRT(19.68%^2 - 1.50^2 * 11.68%^2) = 8.98% (rounds to 9.0% in my video). Cool, right?
How come truly diversified portfolio have a correlation of 1?
Isn't the point of diversification to reduce the correlation/
Hi I’m final year student in Varsity and completing financial Management. I was hoping know to where can I get these spreadsheets or excels sheets for practical practice
He passed away last year sadly
How is it possible for a maximally diversified portfolio, i.e., with correlation = 1, to not actually BE the market portfolio?? What would be an example of this?
Thank you so much for this valuable video, I wonder if it is possible to get the spreadsheet model.
Sir, thank you is not even enough. I am hoping to land a job in risk and first pay check I'll buy your full frm package including those immaculate spreadsheet descriptions. The practicality is pure genius and to have been doing it since 08' on RUclips is quite impressive. Thank you so so much!
I've got an exam coming up tomorrow on exactly this topic. Thanks for the great explanation! Definitely helped more than the professor's explanation
Thank you! Is there provided excel example?
Your channel is awesome, please, continue the video lessons.
He passed away from covid unfortunately
@@MaximillionIeraci-v3y no way, really? very sad
@@MaximillionIeraci-v3y On LinkedIn, it says he founded a new company in March this year. Where is your source?
@@MaximillionIeraci-v3y he still seems to be posting on linkedin and on substack. Looks like he sold bionic turtle in 2021 and left in 2024
Excellent sus videos. Thank you.
Hi, your videos are very lively and interesting, and I am looking forward to working with you. How can I contact you?