I did the math and number crunching last night my portfolio has a beta of 1.09 but has seen a return of 12.30% YTD so would my portfolio land somewhere above the capital market line of say the S&P? Reading comments and seeing college kids using this video for studying… then there is me 16, found my passion, and it lead me here on April 11th 2023
Sir, as in every text book , they use Beta instead of standard deviation p divided by standard deviation M so does it mean beta literally equals to standard deviation of p / standard deviation of M ??
Your explanation is excellent. However, I get confused b/c I had to compute E[r] on the market as part of the sample data at the beginning of project (along with asset data). So, that is, data for a relevant index (i.e. the one my assets are derived from), over a 5 year period. So, now I'm worried I'll just get confused. They basically have the same name. The average of the 5 years worth of the TSX data has a return (i.e. expected rtn.) of 0.78%, and if I'm right, is called the expected return on the market. And then there's the Optimal/or tangency/or "market" Expected return which you are calling Expected market return (which is actually only a return on a portfolio, not the market, if I understand right). They have the same name and have nothing in common? I'm so confused (squeezes face!).
@ronald Moy: Hey first of all great job. One query : while showing the example When you said 2% standard deviation of portfolio does it mean investment SD* correlation with market already? Correct me please but I think The volatility of the portfolio should be = volatility of investment * correlation with market.
Just the risky assets. Technically, it should include all risky assets, even human capital, but in practice we usually use a stock market index like the S&P 500.
The efficient frontier is the set of optimal portfolios that offers the highest expected return for a given level of risk or the lowest risk for a given level of expected return. Portfolios that lie below the efficient frontier are sub-optimal, because they do not provide enough return for the level of risk.
What do you call the bottom part of the efficient frontier line. The definition of the efficient frontier doesn't hold for the bottom part of the curve.
You're right. Only the upper half is efficient. Sometimes we speak of the minimum variance frontier, which would have the lowest variance for a given expected return. This would give us the bottom half of the curve.
That makes sense thanks. I have a question in regards to the capital market line. You gave an example to show how you could get a point on the lending side of the capital market line. You said you can put half your money in the risky portfolio and half in treasury bills (the risk free rate). Would the risk free rate not be something like the banks interest rates? is there not some risk with treasury bills. Also could treasury bills not potentially be in your portfolios.
There is no default risk in a T-bill. There is purchasing power risk because inflation may exceed the return you are getting. If you don't want to have T-bills in your portfolio, you can own the market portfolio, which consists of all risky assets held in their market value proportions.
They are different models. The CML looks at total risk (SD) for a portfolio of securities. The SML is derived as an equilibrium pricing model and uses beta, because it measures the volatility relative to the market portfolio. For the SML we are looking at the risk and return tradeoff for an individual security. For the individual security, we care about the risk it brings to our portfolio, which is the risk you can't diversify away (beta).
I could not understand what the book or my professor was talking about. You have done a great job explaining the concept.
Thank you so much!
same here....my books sucks......
you simplified in one slide what my book could not, thank you!
Best explanation I have ever heard on this topic. Best video on CML so far. 👍👍😅😅
Well done. Great explanation.
I did the math and number crunching last night my portfolio has a beta of 1.09 but has seen a return of 12.30% YTD so would my portfolio land somewhere above the capital market line of say the S&P?
Reading comments and seeing college kids using this video for studying… then there is me 16, found my passion, and it lead me here on April 11th 2023
Thank you, good explanation sir
Fantastic! It could not have been made more clear:)
Sir thanks a lot🥹
Please make a video on the arbitrage pricing model & multi factor model
ruclips.net/video/8VczkHdq5XI/видео.html
thank you
Sir, as in every text book , they use Beta instead of standard deviation p divided by standard deviation M so does it mean beta literally equals to standard deviation of p / standard deviation of M ??
great video. great insights, well done
This was very helpful thank you !
OMG it finally makes sense! Thank you so much :)
Well explained.
Your explanation is excellent. However, I get confused b/c I had to compute E[r] on the market as part of the sample data at the beginning of project (along with asset data). So, that is, data for a relevant index (i.e. the one my assets are derived from), over a 5 year period. So, now I'm worried I'll just get confused. They basically have the same name. The average of the 5 years worth of the TSX data has a return (i.e. expected rtn.) of 0.78%, and if I'm right, is called the expected return on the market. And then there's the Optimal/or tangency/or "market" Expected return which you are calling Expected market return (which is actually only a return on a portfolio, not the market, if I understand right). They have the same name and have nothing in common? I'm so confused (squeezes face!).
@ronald Moy: Hey first of all great job.
One query : while showing the example
When you said 2% standard deviation of portfolio does it mean investment SD* correlation with market already?
Correct me please but I think The volatility of the portfolio should be = volatility of investment * correlation with market.
It's just the standard deviation you would normally compute using return data. It is not multiplied by the correlation with the market.
thanks a ton
this video helped me alot in understanding cml.
You're very helpful! Thanks alot!
Very good Video.. Thanks a lot!!
sir why all portfolios in the CML is considered as efficient.?
Because they have the highest expected return for each level of standard deviation or the lowest standard deviation for each level of expected return.
Ronald Moy thank you
very helpful thank you mate.
Hi, does market portfolio includes risk free assets? or is it made up of completely risky asset?
Just the risky assets. Technically, it should include all risky assets, even human capital, but in practice we usually use a stock market index like the S&P 500.
What is efficient frontier
The efficient frontier is the set of optimal portfolios that offers the highest expected return for a given level of risk or the lowest risk for a given level of expected return. Portfolios that lie below the efficient frontier are sub-optimal, because they do not provide enough return for the level of risk.
What do you call the bottom part of the efficient frontier line. The definition of the efficient frontier doesn't hold for the bottom part of the curve.
You're right. Only the upper half is efficient. Sometimes we speak of the minimum variance frontier, which would have the lowest variance for a given expected return. This would give us the bottom half of the curve.
That makes sense thanks. I have a question in regards to the capital market line. You gave an example to show how you could get a point on the lending side of the capital market line. You said you can put half your money in the risky portfolio and half in treasury bills (the risk free rate). Would the risk free rate not be something like the banks interest rates? is there not some risk with treasury bills. Also could treasury bills not potentially be in your portfolios.
There is no default risk in a T-bill. There is purchasing power risk because inflation may exceed the return you are getting. If you don't want to have T-bills in your portfolio, you can own the market portfolio, which consists of all risky assets held in their market value proportions.
God bless u
Why you use sd in cml and beta in sml
They are different models. The CML looks at total risk (SD) for a portfolio of securities. The SML is derived as an equilibrium pricing model and uses beta, because it measures the volatility relative to the market portfolio. For the SML we are looking at the risk and return tradeoff for an individual security. For the individual security, we care about the risk it brings to our portfolio, which is the risk you can't diversify away (beta).