The Mega Scam in the Indian Banking System
Indian banking sector is divided into two. There are public sector banks, and then there are private sector banks. The public sector banks, i.e., banks owned by the government are known as bureaucratic organizations where inefficiency is rampant. However, these banks are also known to be prone to corruption. This is because executives at state-owned […]
Technology and Banking Delivery Channels
Technology has touched every aspect of our lives in the recent years and banking has been no exception. Huge strides made by information technology have allowed banks to provide much better levels of service to their customers at drastically lower costs. The deployment of technology has also changed the channels via which customers interact with […]
The Silicon Valley Bank Collapse: Why Is It Important?
In the second week of March 2023, the Silicon Valley Bank, which is headquartered in Santa Clara California collapsed in spectacular fashion. The shares of the bank fell by over 60% in one day. There was a classic run on the bank which led to a collapse almost overnight! This created a panic-like situation across […]
Interbank Market – Meaning, Importance and its Functions
The banking system is the bedrock upon which the modern financial system stands. The banking system is highly integrated with the entire economy. Retail borrowers, small and medium enterprises, large companies as well as governments are all involved in borrowing money from banks at regular intervals. It is for this reason that the well-being of […]
How Ultra Long Term Bonds Work?
In September 2018, Austria became the latest developed country to issue ultra-long-term bonds. As per the deal, Austria raised a total of $4.2 billion which have to be paid back after 100 years! The interest rates on this bond were 2.11%. This deal is being called the largest ever issue of bonds which have a […]
Portfolio management refers to the art of managing various financial products and assets to help an individual earn maximum revenues with minimum risks involved in the long run. Portfolio management helps an individual to decide where and how to invest his hard earned money for guaranteed returns in the future.
Capital Asset Pricing Model also abbreviated as CAPM was proposed by Jack Treynor, William Sharpe, John Lintner and Jan Mossin.
When an asset needs to be added to an already well diversified portfolio, Capital Asset Pricing Model is used to calculate the asset’s rate of profit or rate of return (ROI).
In Capital Asset Pricing Model, the asset responds only to:
What are Non Diversifiable Risks ?
Risks which are similar to the entire range of assets and liabilities are called non diversifiable risks.
Where is Capital Asset Pricing Model Used ?
Capital Asset Pricing Model is used to determine the price of an individual security through security market line (SML) and how it is related to systematic risks.
What is Security Market Line ?
Security Market Line is nothing but the graphical representation of capital asset pricing model to determine the rate of return of an asset sensitive to non diversifiable risk (Beta).
Stephen Ross proposed the Arbitrage Pricing Theory in 1976.
Arbitrage Pricing Theory highlights the relationship between an asset and several similar market risk factors.
According to Arbitrage Pricing Theory, the value of an asset is dependent on macro and company specific factors.
Modern Portfolio Theory was introduced by Harry Markowitz.
According to Modern Portfolio Theory, while designing a portfolio, the ratio of each asset must be chosen and combined carefully in a portfolio for maximum returns and minimum risks.
In Modern Portfolio Theory emphasis is not laid on a single asset in a portfolio, but how each asset changes in relation to the other asset in the portfolio with reference to fluctuations in the price.
Modern Portfolio theory proposes that a portfolio manager must carefully choose various assets while designing a portfolio for maximum guaranteed returns in the future.
Value at Risk Model was proposed to calculate the risk involved in financial market. Financial markets are characterized by risks and uncertainty over the returns earned in future on various investment products. Market conditions can fluctuate anytime giving rise to major crisis.
The potential risk involved and the potential loss in value of a portfolio over a certain period of time is defined as value at risk model.
Value at Risk model is used by financial experts to estimate the risk involved in any financial portfolio over a given period of time.
Jensen’s Performance Index was proposed by Michael Jensen in 1968.
Jensen’s Performance Index is used to calculate the abnormal return of any financial asset (bonds, shares, securities) as compared to its expected return in any portfolio.
Also called Jensen’s alpha, investors prefer portfolio with abnormal returns or positive alpha.
Jensen’s alpha = Portfolio Return – [Risk Free Rate + Portfolio Beta * (Market Return – Risk Free Rate)
Treynor Index model named after Jack.L Treynor is used to calculate the excess return earned which could otherwise have been earned in a portfolio with minimum or no risk factors involved.
Where T-Treynor ratio
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