Principals of Finance Discussion Boards (Coursework Sample)

Principles of finance
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Principles of finance
The Modern Portfolio Theory (MTP) states that it is feasible to devise a perfect portfolio that will present the investor with the highest returns by taking on the optimal level of risk. Specifically, MTP espouses the diversification of securities and asset classes (Cornett et al., 2019). Although adequate diversification of a portfolio cannot escape systemic risk, it can reduce or eliminate unsystematic risk. Taking into account the advantages of portfolio diversification, the ideal portfolios investors can hold with risky assets are efficient portfolios on the efficient frontier. However, if an investor is able to borrow and lend at a risk-free rate, they have the potential to outperform the efficient frontier. Investors seeking to outperform the efficient frontier must consider allocating their portfolio between the risk-free rate and the market portfolio. An appropriate balance between the risk-free rate and the market portfolio can help an investor find a portfolio with a level of risk similar to an efficient portfolio but with an increased expected return.
Market risk premium defines the connection between gains from a stock market portfolio and Treasury bond returns. The risk premium takes into account the required profits, historical profits, and expected profits (Fernandez, 2004). The historical market risk premium remains the same for all investors because the value is extracted on the basis of what took place. Variations, however, occur with the required and expected market