INVESTMENT AND PORTFOLIO MANAGEMENT Assignment Example | Topics and Well Written Essays - 2000 words

INVESTMENT AND PORTFOLIO MANAGEMENT - Assignment ExampleThe investor who prefers to bank his funds to generate a fixed certain interest at the wind up of a term is the classic cheek of risk-averse individual while a casino gambler who bets against high enigmatic odds is at the other give notice of the spectrum (Pietersz, 2009).In scenario whereby an individual investment is assured of a 500 production, in the uncertain situation, a bet is considered that with a toss of a penny, the individual chamberpot get 1,000 or naught, while in the certain situation the individual will definitely receive the 500. Although both situations have a guaranteed return of 500, the uncertain situation has a 50 percent chance of garnering 1,000 or nothing. Therefore, three possible scenarios emergeRisk aversion is therefore a characteristic case of martingale effect whereby the most likely scenario is the investor risk-taker only gaining the original amount (Yates, 2009). In modern portfolio theory , risk aversion is calculated as the added subsidiary return an investor needs to admit supplementary risk, which is calculated through the standard deviation of the ROI or the square root of its variance (Baker, 2001).Modern portfolio theory established mean-variance competent portfolios in a fixed time horizon that ignored future market movements hence not applicable to multi-period investment horizon. Sharpe (1964), Lintner (1965) and Mossin (1966) separately have been ascribed to establishing the majuscule Asset Pricing Model (CAPM) model that was developed from Markowitzs (1959) exposition of the Modern Portfolio Theory (MPT) particularly the mean-variance model. The fundamental theory of the CAPM indicates that there is a linear tie-in involving systematic risk, as measured by beta, and projected region returns (Brewton, 2009). The CAPM model endeavours to illustrate the linkage by applying beta to describe the differences involving the likely proceeds from shares and shar e portfolios (Laubscher, 2002, p.