© K. Cuthbertson and D. Nitzsche Figures for Chapter 10 PORTFOLIO THEORY AND ASSET RETURNS (Investments : Spot and Derivatives Markets)

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Presentation transcript:

© K. Cuthbertson and D. Nitzsche Figures for Chapter 10 PORTFOLIO THEORY AND ASSET RETURNS (Investments : Spot and Derivatives Markets)

© K. Cuthbertson and D. Nitzsche Figure 10.1 : Increasing size of portfolio Standard deviation No. of shares in portfolio Diversifiable / idiosyncratic risk Market / non-diversifiable risk C

© K. Cuthbertson and D. Nitzsche Figure 10.2 : Individual preferences ER p pp A B  Z I2I2 I1I1 I 2 > I 1 Y

© K. Cuthbertson and D. Nitzsche Figure 10.3 : Efficient frontier 1, 0 0, 1 0.5, , 0.25

© K. Cuthbertson and D. Nitzsche Figure 10.4 : Risk reduction through diversification  = -0.5  = +1  = -1  = +0.5  = 0

© K. Cuthbertson and D. Nitzsche Figure 10.5 : Efficient frontier (=AB) ER p pp x x x x x x x x x x x x x x x x B A C P1P1 P2P2

© K. Cuthbertson and D. Nitzsche Figure 10.6 : Transformation line : 1 riskless + 1 risky asset All lending No borrowing/ no lending 0.5 lending in 1 risky bundle -0.5 borrowing in 1 risky bundle

© K. Cuthbertson and D. Nitzsche Figure 10.7 : Transformation lines : 1 safe + risky ‘bundles’ L L’  k = 30  k = 25

© K. Cuthbertson and D. Nitzsche Figure 10.8 : Efficient frontier and CML D M C A CML

© K. Cuthbertson and D. Nitzsche Figure 10.9 : CML and market portfolio (M) ER  CML r A B M  ER m ER m - r M’s B less risk averse than M’s A w i - optimal proportions at M mm

© K. Cuthbertson and D. Nitzsche Figure : Preferences of M’s A and M’s B ER  CML r A B M  ER m ER m - r M’s B less risk averse than M’s A w i - optimal proportions at M mm IBIB IAIA

© K. Cuthbertson and D. Nitzsche Figure : Security market line (SML) Expected return and actual return SML Beta,  i Q (buy) S (sell) P actual return expected return T (sell) M The larger is  i, the larger is ER i r

© K. Cuthbertson and D. Nitzsche Incorrect Figure 10.6 as shown in the textbook to follow Transformation line : 1 riskless + 1 risky asset

© K. Cuthbertson and D. Nitzsche Figure 10.6 : Transformation line : 1 riskless + 1 risky asset All lending No borrowing/ no lending 0.5 lending in 1 risky bundle -0.5 borrowing in 1 risky bundle

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