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Financial Theories and Strategies. Financial Theories and Strategies Paper
FIN 554 February 15, 2005 Introduction Financial theories ...
... reaching their absolute goal: superior financial performance ... research, define and
create market-based strategies. ... DIFFERENCE: CATC & Other Theories of Exchange ...
... strategies, human resource strategies, financial strategies, legal strategies ... The
problem with most theories is that they ... ideas of 'emergent strategies' and use ...
... under even stronger work pressure and this is how financial assistance turns ... Theories,
strategies and principles The main theory that triggers child labor is ...
... speaks more to Adam Smith's basic theories and how ... presents Hallmark ¦s tax-savings
strategies on corporate ... the US and uses the financial services industry ...
Submitted by tlg431 on October 19, 2005
Category: Business
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Financial Theories and Strategies Paper
FIN 554
February 15, 2005
Introduction
Financial theories are the building blocks of today’s corporate world. “The basic building blocks of finance theory lay the foundation for many modern tools used in areas such asset pricing and investment. Many of these theoretical concepts such as general equilibrium analysis, information economics and theory of contracts are firmly rooted in classical Microeconomics” (Oaktree, 2005)
This paper will define and discuss five financial theories and how they impact business decisions made by financial managers. The theories will be the Modern Portfolio Theory, Tobin Separation Theorem, Equilibrium Theory, Arbitrage Pricing Theory (APT), and the Efficient Markets Hypothesis.
Modern Portfolio Theory (MPT)
The Modern portfolio theory {MPT}, “proposes how rational investors will use diversification to optimize their portfolios, and how an asset should be priced given its risk relative to the market as a whole. The basic concepts of the theory are the efficient frontier, Capital Asset Pricing Model and beta coefficient, the Capital Market Line and the Securities Market Line. MPT models the return of an asset as a random variable and a portfolio as a weighted combination of assets; the return of a portfolio is thus also a random variable and consequently has an expected value and a variance.
Risk in this model is identified with the standard deviation of portfolio return. Rationality is modeled by supposing that an investor choosing between several portfolios with identical expected returns will prefer that portfolio which minimizes risk.” (Wikipedia, 2005) Figure 1 and Figure 2 are examples on how this theory can be illustrated on a graph.
Using the Modern Portfolio Theory, overtime risk assets will provide a higher expected rate of...
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