Portfolio Theory & Related Topics

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Presentation transcript:

Portfolio Theory & Related Topics

Some Basic Ideas Return Risk Risk Free Rate Utility Function

Vi Vf Time Return (for a given holding period) = (Vf – Vi) / Vi More generally V1 V2 V3 Vi Vi+1 Vn Return = Ri+1 = (Vi+1 - Vi)/ Vi

V1 V2 V3 Vi Vi+1 Vn Return = Ri+1 = (Vi+1 - Vi)/ Vi Expected Return = E(R) ~ St. Deviation can be estimated as =

V1 V2 V3 Vi Vi+1 Vn Vn – V1 = V1 ( 1 + g) (n-1) Geometric average (GEOMEAN)

Table 5.3 History of Rates of Returns of Asset Classes for Generations, 1926- 2005 What could be problematic about this table?

DEFINITION Excess Return = Actual Rate of Return - Risk Free Rate Risk premium is the expected value of the excess return What is it? Sharpe ratio (for a portfolio) = Risk Premium / St. Dev. Of Return

Table 5.4 History of Excess Returns of Asset Classes for Generations, 1926- 2005