Turkcell Case
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Title:
Traditional versus Modern Portfolio Theory: Whos Right?
Statement of the Problem:
What is the best way to invest: hold a broadly diversified portfolio or look carefully at stocks possessing desired risk return characteristics and then invest all ones money in the single best stock?
View Points:
Walt Davies and Shane O Brien are managers for Lee. Inc. Over the years, as they moved through the firms sales organization, they became (and still remain) close friend. Walt, who is 33 years old, currently lives in Princeton New Jersey and Shane who is 35, lives in Houston Texas.
Objectives:
To know why a mutual fund investment may be over diversified.
To know what is the use of beta in measuring risk.
To described briefly the traditional approach to portfolio management and modern portfolio theory.
Recommendation:
Select the investments on the basis of economic grounds.
Buy stocks in companies with potential for surprises.
Invest on stocks where risk is less and greater in return.
Dont put trust in only one investment. It is like “putting all the eggs in one basket “. This will help lessen the risk in the long term.
Questions:
Walts emphasize that to be safe, a person needs to hold a broadly diversified portfolio and that only those with lot of money and time can achieve independently the diversification that can be readily obtained by purchasing mutual funds shares. Mutual funds needs diversification to reduce overall risk in a portfolio and it is an important aspect of creating an efficient portfolio. One does not need to have a hundred of thousand dollars in able to diversified adequately if no risk occurred from investing.
Shanes argued that one must do is look carefully at stocks possessing desired risk return characteristics and then invest ones money in the single best stock. Using of beta as substitute for diversification is not enough because diversification is needed to have efficient portfolio which provides higher return and lower risk. Here are the key assumptions underlying the use of beta as risk measure:
Beta measures the non-diversifiable (or market) risk of a security.
The beta for the market is 1.00
Stocks may have positive or negative betas. Nearly all positive.
Stocks with betas greater than