Finance Portfolio Management: CAPM Theory, Conflict Points, Islamic Finance

This article covers various aspects of finance portfolio management, including CAPM theory, conflict points between investors and fund shareholders, and Islamic finance. It explains the implications of Islamic finance and its role in the economy. The article also discusses the differences between Numeric Investors and Dimensional Fund Advisor, and the concept of long and short funds.

Finance portfolio management

TABLE OF CONTENTS
Question A.................................................................................................................................3
A1...........................................................................................................................................3
A2...........................................................................................................................................3
Question B..................................................................................................................................4
B1...........................................................................................................................................4
B2...........................................................................................................................................4
B3...........................................................................................................................................5
B4...........................................................................................................................................5
Islamic Finance..........................................................................................................................5
References..................................................................................................................................7

QUESTION A
A1
In accordance with CAPM theory, the possible return of a specific portfolio or security is
equivalent to the rate on safe security along with a risk premium. In a situation where security
or portfolio is not able to satisfy or surpass the expected return then the investment is not
strategically viable1.
Brief of CAPM can be presented as per the given formula:
Required (or expected) Return = RF Rate + (Market Return – RF Rate)*Beta
=5%+.9(0-5)
=0.5%
Answer is D, i.e. 0.5%
A2
We know from statistics that
Z=X −μ /σ
It can be cited as a standardized variable having mean zero and standard deviation of one.
What is meant by this, for this aspect we can identify the possibility of noticing particular
results by substituting numbers in the formula meant for Z and considering the possibility in a
distribution table, often known as a table of normal curve areas2.
Z=.20-0/.20
(Target value - population mean) / Population standard deviation
=1
The Z score indicates that an observed return of losing money is .4 as standard deviations are
equal to the mean. By considering a table of normal curve, areas has an entry of .3413 for Z =
1 Chandra, P., (2017). Investment analysis and portfolio management. McGraw-Hill Education.
2 Klingebiel, R. & Rammer, C. (2014). Resource allocation strategy for innovation portfolio management.
Strategic Management Journal.35(2), 246-68.

1 By considering the fact that the normal distribution is symmetric, the probability of losing
money in 4 years will be 1, i.e. 34% which means the probability of losing money over the
next four years will be about one in three.
Answer is E, i.e. about 1 in 3
QUESTION B
B1
 The first problem is based on the point of conflict between investors and fund
shareholders. Such shareholder requires high amounts of after tax-returns at minimum
cost.
 The second problem is based on the point of conflict between the fund manager and Fund
Management Company. Such conflict occurs due to funding manager that provide
incentive to bring consistency in investment decision with the wealth maximization of
shareholders
 Mutual fund portfolio provides the diversity in the investor's risk appetite. Hence, three
model portfolios are described by the mutual funds that are conservative, aggressive, and
moderate.
 Thus, by the help of hedge funds, the management of investment risk has been made on
the basis of financial market changes3
B2
 Numeric investors is a privately owned investment manager responsible for providing its
services to profit sharing plans, high net worth individuals and corporate pension.
 In numeric investors, an organization manages a separate equity portfolios
 The hedge funds are also managed by numeric investors firm.
3 Parida, S., & Teo, T. (2018). The impact of more frequent portfolio disclosure on mutual fund
performance. Journal of Banking & Finance, 87, 427-445.

 On another hand, the dimensional fund advisor approach is based on a market belief.
 It draws the expected returns from the market itself rather than relying on futile
forecasting
 One major difference analyzed among both firm is that numeric investors focused only on
services to profit sharing plans, great net worth individuals and cooperate pension, and
dimensional fund advisor also focus on market approach along with others factor
B3
 The long and short fund can exploit both positive and negative information. The risk is
associated with negative factors
 Long and short funds have some sector weights. It provides the short and long sector
exposure
 However, the sector-specific risk is neutralized, and stock risk will remains same. In
addition, numeric investors manage and monitor risk across numeric portfolios.
 The firm conducts researches into new risk management techniques and risk
measurement
 In the dimensional fund, advisory uses derivatives for the non-hedging purposes that are
considered to be riskier than other investments. The derivatives used in small-cap value
portfolio will directly expose to the risk. Hence it is riskier than numeric investors 4
4 Polzin, F., Sanders, M., & Stavlöt, U. (2018). Do investors and entrepreneurs match?–
Evidence from The Netherlands and Sweden. Technological Forecasting and Social
Change, 127, 112-126.

B4
 The number of funds offered by Numeric Investors closed to new investment because it
does not emphasize its focus to draws the expected returns from the market itself. But, it
focuses on containing funds that employ techniques of different growth and values
 Hence, the management fee structures vary funds to funds because of the different nature
of the fee structure. However, the structure is based on the Asset under Management
Percentage
ISLAMIC FINANCE
In today’s era of transforming economic environments, there has been a massive
growth seen in Islamic Finance. Suddenly, there was a significant change analyzed in Islamic
Finance sector. It is due to the reason that Islamic Finance was witnessed in a developing
stage during the financial crises of 2008. During that time Islamic Financing not only
managed to sustain but also expands over the times. However, the issue is still same that is
Islamic Finance is mature to implement in economic system state or might be it is not ready
to drive on; hence it is always a debatable point.
The Islamic Pioneers identified that an economy which follows Islamic principles and
values would strive in order to fulfil the Shariah goals. Thus, it results in achieving the
vibrant economy because the main aim and vision of the Islamic laws is to provide benefits
and welfare of mankind and prevents humanity from harms. It has been argued that Islamic
values will not only responsible for managing a moral economy on the basis of the financial
system and not only served Muslims but also satisfy the needs of the mankind.
It is denoted in the study of Alagabi, et al., (2018) the implication of the Islamic
finance vision was not to only deal with the legal requirements. However, another aim of the
financial institution is to cater the ethical and social needs of the mankind. In addition, the
main perspective of Islamic Financing is to entail the value proposition for the Islamic
Institutions5. Such institutions elaborate the risk sharing features and work to provide services
to all society section. Thus, it would bring about the growth, stability, and equity.
5 Alagabi, A. G. A., Abdul-Majid, A. H., & Rashid, R. A. (2018). Attribute Prioritization in Discrete Choice
Experiment: Challenges and Suggested Approach in a study on Malaysian Islamic Finance Talent Job
Choice. IJAME.

As a part of the ethical economy by following the Shariah standards, the obligation
nature regarding the Islamic organization including Islamic institution is appeared to be
different. Moreover, it is the duty of the Islamic institutes to meet all requirement including
national laws and Islamic laws at the time of transactions. In addition, it is the essential duty
of the Islamic financing firms to confirm the ethical requirements on the basis of both Islamic
and national perspective6. The role of Islamic Finance has been found in favour of the society
by serving different sectors and making the economy sustainable.
In a nutshell, being a part of the Islamic economy, the incentives and value
proposition of the Islamic industry is to promote the improvement and welfare of society.
Hence, Islamic Financial institutions essentially focus on maintaining a strategic distance
from illegal issues. The practice of the Islamic institutions primarily appears to focus on
avoiding the legal prohibition. Furthermore, it is elaborated that by ignoring the foundation
values and keeping a concise focus on legal compliance will strip the industry into spirit and
essence. If the financial institutes neglect the foundational esteems and values, it will keep on
being recognized as a restriction driven industry and fails to assert its unique value of being
ethical, social, and moral in the economy.
6 Shaban, M., Duygun, M, & Fry, J. (2016).SME's lending and Islamic finance. Is it a “win–win” situation?.
Economic Modelling., 5:1-5.

BIBLIOGRAPHY
Alagabi, A. G. A., Abdul-Majid, A. H., & Rashid, R. A. (2018). Attribute Prioritization in
Discrete Choice Experiment: Challenges and Suggested Approach in a study on Malaysian
Islamic Finance Talent Job Choice. IJAME.
Parida, S., & Teo, T. (2018). The impact of more frequent portfolio disclosure on mutual
fund performance. Journal of Banking & Finance, 87, 427-445.
Polzin, F., Sanders, M., & Stavlöt, U. (2018). Do investors and entrepreneurs match?–
Evidence from The Netherlands and Sweden. Technological Forecasting and Social
Change, 127, 112-126.
Shaban, M., Duygun, M, & Fry, J. (2016).SME's lending and Islamic finance. Is it a “win–
win” situation?. Economic Modelling., 5:1-5.
Chandra, P., (2017). Investment analysis and portfolio management. McGraw-Hill Education.
Klingebiel, R. & Rammer, C. (2014). Resource allocation strategy for innovation portfolio
management. Strategic Management Journal.35(2), 246-68.