1.
How does the notion of risk and
return govern financial managers? What are the major assumptions...

Question

1.
How does the notion of risk and
return govern financial managers? What are the major assumptions of modern portfolio
theory as postulated by Harry Markowitz? What refinements does the CAPM
provide?
2.
What are the major sources of
short term finance in less developed countries? What are the advantages and disadvantages
of these sources? In choosing a source of short term finance, what factors
should you be concerned with?
3.
Briefly outline the major factors/variables
you should take into consideration in the management of a company’s current
assets. Why should the management of current assets take up more of a finance
managers’ time than the management of fixed assets?

	
Document Preview: How does the notion of risk and return govern financial managers? What are the major assumptions of modern portfolio theory as postulated by Harry Markowitz? What refinements does the CAPM provide?What are the major sources of short term finance in less developed countries? What are the advantages and disadvantages of these sources? In choosing a source of short term finance, what factors should you be concerned with?Briefly outline the major factors/variables you should take into consideration in the management of a company’s current assets. Why should the management of current assets take up more of a finance managers’ time than the management of fixed assets?

Robert · Accepted Answer

QUESTION: 
How does the notion of risk and return govern financial managers? What are the major 
assumptions of modern portfolio theory as postulated by Harry Markowitz? What refinements 
does the CAPM provide? 
SOLUTION: 
In competitive and efficient markets, higher rewards can be achieved with higher risk. The 
finance manager is continually involved in decisions involving a trade-off between the two. For a 
company it is significant that it does well what it knows well. If a company gets new area of 
working where it has no expertise, there is little reason to believe that rewards will compensate 
with the risk that is involved. There is direct relationship between the risk and return. Higher the 
risk, higher will be the reward of taking the risk. There are three types of investor: risk lover, risk 
averse and risk neutral. The financial manager of company is required to decide company's risk 
level and take decisions accordingly.  
The portfolio theory given by Harry Markowitz is based on various significant assumptions. 
Under these assumptions a portfolio is considered to be efficient if no other portfolio gives a 
higher expected return with the same (or lower) risk or if no other portfolio provides lower risk 
with the same (or higher) return.

1. How does the notion of risk and return govern financial managers? What are the major assumptions of modern portfolio theory as postulated by Harry Markowitz? What refinements does the CAPM provide?...

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