Assumptions of Capital Market Theory and Markowtiz

CFA Level I
#1
  1. Are the assumptions under Capital Market Theory and Markowitz model the same ? To be more precise regarding fractional shares ? 2) Are there some ETFs which are no-load funds ? Thanks,
#2

My take on the CML assumptions… CML is based out of Markowitz model…having said that ALL assumptions of Markowitz theory holds good under the CML…in addition, CML has several assumptions too… one of them is the divisible assets, meaning, investors can buy and sell fractional shares… I hope I am right.

#3

Thanks. Regarding ETFs which one of following is more correct :- 1) They charge load charges 2) They provide diversification with a single transactions. I assume 2 ?

#4

ETFs do not have loads. Loads apply to open end investment vehicles such as Mutual Funds. They CAN provide more diversification that a single transaction.

#5

ETF’s do not charge any load. They trade like closed-end funds. They trade in open markets. examples of some ETFs in real worls are, SKF, DXD DUG etc. And definitely they provide more diversification in a single transaction and they are very volatile

#6

One more thing :- Will it be wise to conclude that adding an risk free asset to a portfolio will increase its return ? Well what i thought was that adding a RF asset reduces the risk but cannot recall of any thing which concludes that return is increased, unlesss the underlying assumption is that risk profile of the new portfolio remains the same.

#7

I think the Returns may not be increased, but for a given return the risk will be minimized. E(Rp) = WmRm + (1-Wm) RFR Risk§ = Wm * Sigma M, Risk of the risky asset only. Since risk is 0, for a risk free asset.

#8

No. I think now i know. It indeed increases the return for that value of risk. Think in the terms that straight line is bit above than effecient frntier. (yeah the same starighlt line which is made by adding RF asset to a portfolio).

#9

Under Capital Market Theory you should be receiving a minimal return equal to the risk free rate. This would be represented at X=0 Y=RFR on the CMT graph. Adding a RF asset to a portfolio will not increase its return.

#10

Adding the RF asset converts effecient fronteir to a straight line. Other than a single point, at all points that sraight line displays more return than the corresponding EF, for the same risk. Which effectively means that return is increased.

#11

Block trades to be traded in (next day) 1) Call Markets or 2) Continous Markets ?

#12

I feel this is a call market

#13

Any reference to the text ?

#14

I think, this happens before the market opens or when the trading stops due to a new information coming into the market because of which there is an enormous number of orders pending to be executed…

#15

My concept is not at all clear regarding call or continous market . Is normal market which opens at 900 and closes at 1700 a call one or a continous one ? I

#16

That will be continuous, I guess. So when the market is open, that is continuos… see below is the definition I got from Investopedia, for the call markets… What Does Call Market Mean? A type of market in which each transaction takes place at predetermined intervals and where all of the bid and ask orders are aggregated and transacted at once. The exchange determines the market clearing price based on the number of bid and ask orders. A call market is contrasted to an auction market, where orders are filled as soon as a buyer/seller is found for any given order at an agreed upon price. Investopedia explains Call Market In a call market, the price is set by the exchange so the market will clear, or almost clear, every time orders are filled. This is in stark contrast to the auction market, where prices are determined by buyers and sellers. Because the call market groups transactions together, there is a substantial increase in liquidity. Although liquidity is generally considered to be a good quality in any marketplace, sellers may lose some of the liquidity premium, which is can be substantial.

#17

Then i think the answer to asked question was also continous one. right ?

#18

Hmm… Honestly speaking, I do not remember how the question was worded, some reason I felt the answer was ‘Call markets’ I may be wrong on that :=(

#19

the answer was a call market…that is how they clear the overnight build up of orders by matching buyers and sellers…then moves to a continuous market

#20

So do you mean that the same market acts like continous and call in the same day ? Difficult to digest :frowning: