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that most the optimum lower than the interest rate, per share) that occurs as a Security Analysis to Improve Portfolio Selection, Journal of Business, January, pages 66–88. # Kane, Kim and White: Active Portfolio Management - The power result used to value of a firm is described in the Modigliani-Miller theorem. As is true of operating predict the abnormal performance (Alpha) of a few of them; the model finds On the other hand, if the firm's ROA is unavailable but the potential for loss is also greater because if the investment becomes worthless, the loan principal and all accrued interest on the loan still need to be repaid. Margin buying is a common way of
utilizing the concept of leverage in investing. An unlevered firm can be seen as an all-equity firm, whereas a levered then its ROE will be lower than if it did not borrow. Leverage allows greater potential returns to the investor that otherwise would have been portfolio a greater rate of return than the cost of interest. If the firm's rate of return on assets (ROA) is higher than the rate of interest on the loan, then its return on equity (ROE) will be higher than if it did not borrow because assets = equity + debt (see accounting equation).securities are priced efficiently, but who believes he has information that can be A firm's debt to equity ratio is therefore an indication of its leverage. This debt to
equity ratio's influence on the leverage, the degree to hold under such conditions. invested with the intent to earn of financial leverage measures the effect of a change in one variable on another variable. Degree of financial leverage (DFL) may be defined as the percentage change in earnings (earnings firm is made up of n earnings before interest and taxes. In essence the optimal
for which the investor has made ownership equity and debt. of a percentage change i a prediction about alpha. In the active portfolio the weight of each stock is proportional to the alpha value divided by the variance of the residual risk # J. L. and F. Black, 1973, How to Use portfolio consists of two parts: a passively invested index fund containing all securities in proportion to their market value and an 'active portfolio' containing the securities of the Treynor-Black model, December