Portfolio Theories Flashcards
2 classifications of Portfolio Theories
Traditional
Modern
Theories under Traditional Approach
Dow Theory
Random Walk Theory
Formula Theory
Theories under Modern Approach
Harry Morkowitz Modern Portfolio Management Theory
the stock market does not move on a random basis but is influenced by three distinct cyclical trends that guide its direction.
Dow Theory
3 distinct cyclical trends
- Primary Movements
- Secondary Reactions
- Minor Movements
These are the long term movements (from one to three years or more) of the prices of the securities on the stock exchange. Such movements can sway the entire market up or down.
Primary Movements
the behaviour of stock exchange prices is almost unpredictable and there is no relation between the present and future stock prices.
Random Walk Theory
primarily oriented to achieve loss minimization rather than return maximization.
Formula Plans
2 portfolio constructed in Formula Plan
Aggressive
Defensive
both the aggressive and defensive portions remain in constant percentage of the portfolio’s total value.
Constant Ratio Plan
It is a theoretical framework for the analysis of risk return choices. Decisions are based on the concept of ‘Efficient Portfolios’.
Modern Portfolio Theory
a financial model that calculates the expected rate of return for an asset or investment.
Capital Asset Pricing Model
