Research Project I

Harry Markowitz, Portfolio Selection. History The Modern Portfolio Theory (MPT) was established in 1952 by Harry Markowitz. The most fundamental concept of the MPT was the impact on portfolio diversification due to the number of securities and their covariance relationship within the portfolio. Diversification is the most important concept of the MPT. The portfolio selection theory is based on the normative theory, meaning that investors who shall pursue the constructing of a portfolio shall do it under the standard or norm behaviour . According to Markowitz(1952, 77-91), they are two stages of selecting a portfolio. The first stage is the observation and experience that leads to the beliefs about future performances of the available securities.   The second stage begins with the relevant beliefs about the future performances that results with the choice of portfolio. The paper focuses on the second stage. The portfolio selection is solely based on the “expected re...

The economic relevance as well as all the financial market mechanics that underpin ETFs Many exchange traded funds (ETFs) track the return of the financial stock market index. They achieve this by holding an underlying basket of the stocks traded in financial markets. Exchange traded funds can be divided into physical and synthetic ETFs where physical ETFs closely track the return of their benchmark index while synthetic ETFs track the index by entering into derivatives contracts such as total return swaps on the benchmark index ( David, Franzoni and Moussawi et al 2017:171) . The shares of an exchange traded fund can be bought through a brokerage firm from the stock exchange but institutional investors can purchase the shares directly from the fund company (Philips et al. 2008).   When someone wants to buy the shares, no new shares are created but instead the shares come from someone who also owns the shares in the fund and is willing to sell a fraction (Philips et al....

The 3 fundamental factors and the financial or analytical proxies that capture these factors in a quantitative measure: There are certain firm characteristics, known as style anomalies, which appear to be proxies for risk. The traditional Capital Asset Pricing Model does not capture these anomalies. The three fundamental factors that we deal with are moment, size and value. These fundamental characteristics could essentially be responsible for a portion of the shares returns. The momentum anomaly says that have outperformed the market over the past 12 months are likely to continue outperforming in the near future.   This is often caused by investors overreacting in the short run. A proxy used to measure this momentum factor would be relative price appreciation . Size is one of the more common fundamental factors. This anomaly says that the smaller firms tend to outperform the larger firms (inverse relationship between firm size and stock returns). This is measures b...

The JSE|FTSE Top40 Index consists of the 40 largest, ranked by market capitalization on the, JSE stock exchange (FTSE Russell Factsheet). Market capitalization is defined as the market value of a company’s outstanding shares and is therefore calculated by multiplying the current market price of one share by the total outstanding shares for that company (Investopedia). Market capitalization is an effective way to rank companies as it is an effective risk measurement of a company. If companies have a large market capitalization they are usually well-established that deliver consistent dividends to their shareholders. The Top40 Index represents over 80% of the total market capitalization of all JSE listed companies and is therefore a fair reflection of the South African stock market as a whole. It is comprised from its universe – the All Share Index, which represents 99% of the full market capitalization of all equities listed on the JSE Main Board. The number of constituent companie...