European sovereign debt crisis DURING 2010-2011 – Essay Example

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(Mitropoulos & Pelagidis, 2010) These programs have been progressing at a very slow tempo and have, therefore, derailed the reform programs in the health, labor culture and pension schemes and for such reasons, the country has been facing major structural unemployment in the last decade especially among the young people. This has been compensated by the GDP in regard to the feeble laws that have been imposed. (Schneider et al. , 2010) On April 23rd 2010, the Greek government made an official request to be assisted by the IMF in conjunction with the euro zone countries because its statistics had shown a major crisis in its part to raise the funds to repay what they owe other countries.

IV. Body Portfolio Theory and CAPM Due to situations like the ones facing the European market, investors have come up with various ways to determine pricing of their stocks and manage their risky portfolios alike. Some of the theories used under such are Portfolio theory and CAPM. These are expounded as per the following paragraphs. Portfolio theory is a theory that is centered on the process through which any given investor can make up portfolios that maximize the amount of expected returns putting into account the market risk constraint.

These investors are always assumed to be risk averse. The theory explains that it is a possibility to establish an ‘efficient frontier’ for the most optimal portfolios considering the maximum return at a given amount of risk. (investopedia. com, 2011) CAPM- Capital Asset Pricing Model, on the other hand, is a model used by investors to explain the existing relationship between expected returns and the risk. It is applied in the pricing of stocks that are considered risky.

The main idea behind this model is the urge by investors to get their compensation in two major ways: risk and money time value. The formula used under CAPM is; r = rf + βa (rm + rf); where rf = risk free return rate βa = the stock’s beta rm = Market’s expected return (investopedia. com, 2011) Woes to the Economy The German-Greek spread was very high now at 650 basis points now and moody’s, a rating agency down rated the bonds before standard and poor’s further did this to a level that was very low in the late 2010.

A three year stabilization plan for the Greek economy was agreed on among the Euro zone countries, IMF and the Greek government. This was to involve an increased amount to $145. This was not just to happen that way, but the Greek government had to agree to cut its budget deficit in three years from a GDP of 13.6% to 3% by the year 2014.



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