Sharing one of the extract that I liked in Traders Guns and Money – From the Investment bankers prospective all clients are real arseholes but investors are real arseholes. If the buy side say F*** you, before they hang up, investors also say F*** you when they pick up the phone. Here are some key principles for fund management:
1) Diversification: Harry Markowitz proved that putting all your eggs in one basket was risky. Warren buffet continues to defy this successfully. He argues you are better off putting your money into a few things you know and understand, and that are cheap. He doesn’t like the thought of buying all the stuff you know nothing about. Continue reading “Investment Fashions”
Pronounced as though it were spelled cap-m, this model was originally developed in 1952 by Harry Markowitz and fine-tuned over a decade later by others, including William Sharpe. CAPM describes the relationship between risk and expected return, and it serves as a model for the pricing of risky securities. CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. If this expected return does not meet or beat our required return, the investment should not be undertaken.
The commonly used formula to describe the CAPM relationship is as follows:
Required (or expected) Return = RF Rate + (Market Return – RF Rate)*Beta Continue reading “Capital Asset Pricing Model (CAPM)”
I dare to write on this topic as it is the most intense and debatable topic in the financial markets over the years.
As recently the author of “Fooled by Randomness” and “The Black Swan” Nassim Taleb became the anti-theorist in finance arguing that the Nobel committee should be sued for awarding Harry Markowitz, Bill Sharpe and Merton Miller http://www.bloomberg.com/news/2010-10-08/taleb-says-crisis-makes-nobel-panel-liable-for-legitimizing-economists.html
But the Continue reading “EFFICIENT MARKET HYPOTHESIS”