KEUANGAN

INTERNATIONAL
Kelompok 2
Ferhat Husein
Harizan Mukti
I Gde Reza Rizky Margana
Case Summary
• Modern portfolio theory was the creation of Harry Markowitz in •
which he applied principles of linear programming to the
creation of asset portfolios.
• Markowitz demonstrated that an investor could reduce the
standard deviation of portfolio returns by combining assets
that were less than perfectly correlated in their returns
• The theory assumes that all investors have access to the
same information at the same point in time. It assumes all
investors are rational and risk averse, and will take on
additional risk only if compensated by higher expected returns.
• It assumes all investors are similarly rational, although
different investors will have different trade-offs between risk
and return based on their own risk aversion characteristics.
The usual measure of risk used in portfolio theory is the
standard deviation of returns, assuming a normal distribution
of returns over time
Criticisms of portfolio theory are pointed at each and
every assumption behind the theory.
• For example, the field of behavioral economics argues
that investors are not necessarily rational—that in some
cases, gamblers buy risk. All investors do not have
access to the same information, that insider trading
persists, that some investors are biased, that some
investors regularly beat the market through market
timing, whether standard deviations are the appropriate
measure of risk to minimize, or whether the standard
normal distribution is appropriate

Criticisms of Modern Portfolio Theory

• Nassim Nicholas Taleb published a book in 2001 • Taleb argued that a black swan event is characterized
entitled Fooled by Randomness in which he introduced
the analogy of the black swan. The argument is quite
simple: prior to the discovery of Australia and the
existence of black swans, all swans were thought to be
white. Black swans did not exist because no one had
ever seen one.
• But that did not mean they did not exist. Taleb then
applied this premise to financial markets, arguing that
simply because a specific event had never occurred did
not mean it couldn’t.
by three fundamentals: 
• Rarity: The event is a shock or surprise to the
observer
• Extremeness: The event has a major impact
• Retrospective Predictability: After the event has
occurred, the event is rationalized by hindsight,
and found to have been predictable.

Black Swan Theory

• So what causes the “random jumps” noted by • All agree that the behavior of the speculators (in the
Mandelbrot and Taleb? A number of investment words of Keynes) or the jumps of market returns (in the
theorists, including John Maynard Keynes and John words of Mandelbrot) are largely unpredictable. And all
Bogle, have argued over the past century that equity that one can do is try and protect against the
returns are driven by two fundamental forces, unpredictable by building more robust systems and
enterprise (economic or business returns over time) portfolios than can hopefully withstand the improbable.
and speculation (the psychology or emotions of the • But most also agree that the “jumps” are exceedingly
individuals in the market). rare, and depending upon the holding period, the
• First Keynes and then Bogle eventually concluded that market may return to more fundamental values, if given
speculation would win out over enterprise, very much the time. But the event does indeed have a lasting
akin to arguing that hope will win out over logic. This is impact.
what Bogle means in the opening quotation when he
states that “investors are more volatile than
investments.”

What Drives the Improbable?

• Portfolio theory remains a valuable tool. It allows • But the judgement of practical men is—well—difficult to
investors to gain approximate values over the risk and validate. We need predictions of what may come, even
expected returns they are likely to see in their total if it is generally based on the past. Taleb, in a recent
positions. But it is fraught with failings, although it is not edition of Black Swan Theory, notes that the event is a
at all clear what would be better. surprise to the specific observer, and that what is a
• Even some of history’s greatest market timers have surprise to the turkey is not a surprise to the butcher.
noted that they have followed modern portfolio theory, The challenge is “to avoid being the turkey
but have used subjective inputs on what is to be
expected in the future.

What Drives the Improbable?

Case Question
 Question 1:
What are the primary assumptions
• The Efficient Market Hypothesis (EMH) and Modern
behind modern portfolio theory? Portfolio Theory (MPT) depend on a straightforward
supposition that risk is characterized by volatility.
• Modern portfolio theory was the creation of Harry
Markowitz in which he applied principles of linear
programming to the creation of asset portfolios. Markowitz
demonstrated that an investor could reduce the standard
deviation of portfolio returns by combining assets that were
less than perfectly correlated in their returns.
• The theory assumes that all investors have access to the
same information at the same point in time. It assumes all
investors are rational and risk averse, and will take on
additional risk only if compensated by higher expected
returns. It assumes all investors are similarly rational,
although different investors will have different trade-offs
between risk and return based on their own risk aversion
characteristics.
• As per the hypothesis, investors are hazard unfriendly: they
will acknowledge more risk (unpredictability) for higher
returns and will acknowledge low returns for a less volatile
venture. The hypothesis is basic and exquisite, and can
lead to more open scientific evidences and conditions,
which presumably has a lot to do with why it has turned out
to be so broadly acknowledged.
 Key Assumption Behind Modern
Portfolio Theory Question 1:
What are the primary assumptions behind
• There are no transaction costs in buying and selling modern portfolio theory?
securities .There is no financier, no spread amongst
offering and asking costs. You pay no duties of any
sort and just "hazard" has influence in figuring out
which securities an investor will purchase.
• An investor can take any position of any size in any
security he/she wishes. Nobody can move the
market and liquidity is unending. You can purchase
a trillion dollars worth of stock in a little theoretical
mining stock or get one penny worth of Berkshire
Hathaway. Nothing prevents you from taking places
of any size in any security.
• The investor does not consider charges when
settling on speculation choices, and is not interested
in accepting profits or capital increases.
• Investors are rational and risk adverse. They are
totally mindful of all hazards involved in a venture
and will take positions in view of an assurance of
hazard, requesting a higher return for tolerating
more noteworthy unpredictability.
 Key Assumption Behind Modern
Portfolio Theory Question 1:
What are the primary assumptions behind
• Investors look at risk-return relationships over modern portfolio theory?
the same time horizon. A fleeting theorist and
a long haul speculator have the very same
inspirations, time skyline and benefit target.
Notwithstanding your identity, you will
dependably give a speculation a similar
measure of time to work out and instability will
be your exclusive concern.
• Investors have similar views on how they
measure risk. All speculators have similar data
and will purchase or offer in light of an
indistinguishable evaluation of the venture and
all expect a similar thing from the speculation.
A dealer will be roused to offer simply because
another security has a level of unpredictability
comparing to their coveted return. A purchaser
will make a buy since this security has a level
of hazard relating to the arrival that he needs.
 Key Assumption Behind Modern
Portfolio Theory Question 1:
What are the primary assumptions behind
modern portfolio theory?

• Investors try to control chance just by

broadening their property.
• All benefits, including human capital, are
available to be purchased and sold.
• Investors can loan or get at the 91-day T-
charge rate - the hazard free rate - and can
likewise undercut without limitation.
• Legislative issues and investor’s psychology
have no impact on the business sectors.