The Capital Markets: Portfolio Construction In Practice Prof. Ian Giddy New York University New York University/ING Barings.

Slides:



Advertisements
Similar presentations
Optimal Risky Portfolios
Advertisements

Introduction The relationship between risk and return is fundamental to finance theory You can invest very safely in a bank or in Treasury bills. Why.
6 Efficient Diversification Bodie, Kane, and Marcus
F303 Intermediate Investments1 Inside the Optimal Risky Portfolio New Terms: –Co-variance –Correlation –Diversification Diversification – the process of.
5.5Asset Allocation Across Risky and Risk Free Portfolios 5-1.
1 Risk, Returns, and Risk Aversion Return and Risk Measures Real versus Nominal Rates EAR versus APR Holding Period Returns Excess Return and Risk Premium.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Return and Risk: The Capital Asset Pricing Model (CAPM) Chapter.
Stern School of Business
Capital Allocation to Risky Assets
Chapters 9 & 10 – MBA504 Risk and Returns Return Basics –Holding-Period Returns –Return Statistics Risk Statistics Return and Risk for Individual Securities.
Copyright ©1998 Ian H. Giddy Corporate Finance 1 Finance in the Corporation Chairman of the Board and Chief Executive Officer (CEO) Board of Directors.
Efficient Diversification
INVESTMENTS | BODIE, KANE, MARCUS ©2011 The McGraw-Hill Companies CHAPTER 7 Optimal Risky Portfolios 1.
INVESTMENTS | BODIE, KANE, MARCUS ©2011 The McGraw-Hill Companies CHAPTER 7 Optimal Risky Portfolios 1.
Copyright ©2004 Ian H. Giddy Investment Decisions 1 Finance in the Corporation Chairman of the Board and Chief Executive Officer (CEO) Board of Directors.
1 Fin 2802, Spring 10 - Tang Chapter 6: Asset Allocation Fina2802: Investments and Portfolio Analysis Spring, 2010 Dragon Tang Lecture 9 Capital Allocation.
The Capital Markets Prof. Ian Giddy New York University New York University/ING Barings.
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 7-1 Capital Allocation Between the Risky Asset and the Risk-Free.
QDai for FEUNL Finanças November 2. QDai for FEUNL Topics covered  Minimum variance portfolio  Efficient frontier  Systematic risk vs. Unsystematic.
Credit Risk Analysis Prof Ian Giddy Stern School of Business New York University LIB.
Risk Aversion and Capital Allocation to Risky Assets
Optimal Risky Portfolios
McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Efficient Diversification CHAPTER 6.
Return and Risk: The Capital Asset Pricing Model Chapter 11 Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
INVESTMENTS | BODIE, KANE, MARCUS ©2011 The McGraw-Hill Companies CHAPTER 6 Risk Aversion and Capital Allocation to Risky Assets.
Capital Allocation Between The Risky And The Risk-Free Asset
FIN638 Vicentiu Covrig 1 Portfolio management. FIN638 Vicentiu Covrig 2 How Finance is organized Corporate finance Investments International Finance Financial.
Risk Aversion and Capital Allocation to Risky Assets
Investments, 8 th edition Bodie, Kane and Marcus Slides by Susan Hine McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights.
Risk Premiums and Risk Aversion
Intermediate Investments F3031 Summary to Date Investing is about measuring and understanding the risk/return relationship Risk –Measured through the use.
Optimal Risky Portfolios
Class 8 The Capital Asset Pricing Model. Efficient Portfolios with Multiple Assets E[r]  0 Asset 1 Asset 2 Portfolios of Asset 1 and Asset 2 Portfolios.
The Capital Asset Pricing Model
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Efficient Diversification Module 5.3.
McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 7 Capital Allocation Between The Risky And The Risk-Free.
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Portfolio risk and return measurement Module 5.2.
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Efficient Diversification CHAPTER 6.
FIN437 Vicentiu Covrig 1 Portfolio management Optimum asset allocation Optimum asset allocation (see chapter 7 Bodie, Kane and Marcus)
INVESTMENTS | BODIE, KANE, MARCUS Chapter Seven Optimal Risky Portfolios Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or.
Efficient Diversification CHAPTER 6. Diversification and Portfolio Risk Market risk –Systematic or Nondiversifiable Firm-specific risk –Diversifiable.
Copyright ©1997 Ian H. Giddy Portfolio Diversification and the CAPM 1.
Efficient Diversification II Efficient Frontier with Risk-Free Asset Optimal Capital Allocation Line Single Factor Model.
Optimal portfolios and index model.  Suppose your portfolio has only 1 stock, how many sources of risk can affect your portfolio? ◦ Uncertainty at the.
Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 1 Chapter 7.
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Efficient Diversification CHAPTER 6.
Chapter 6 Efficient Diversification. E(r p ) = W 1 r 1 + W 2 r 2 W 1 = W 2 = = Two-Security Portfolio Return E(r p ) = 0.6(9.28%) + 0.4(11.97%) = 10.36%
Investments, 8 th edition Bodie, Kane and Marcus Slides by Susan Hine McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights.
INVESTMENTS | BODIE, KANE, MARCUS Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 6 Risk Aversion and.
Chapter 6 Efficient Diversification Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
Chapter 6 Efficient Diversification 1. Risk and Return Risk and Return In previous chapters, we have calculated returns on various investments. In chapter.
Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 6-1 Chapter 6.
Chapter 6 Efficient Diversification. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. r p = W 1 r 1 + W 2 r 2 W 1 = Proportion.
Class Business Debate #2 Upcoming Groupwork – Spreadsheet Spreadsheet.
FIN437 Vicentiu Covrig 1 Portfolio management Optimum asset allocation Optimum asset allocation (see chapter 8 RN)
Investments, 8 th edition Bodie, Kane and Marcus Slides by Susan Hine McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights.
Portfolio Diversification Modern Portfolio Theory.
Optimal Risky Portfolios
Optimal Risky Portfolios
Risk Aversion and Capital Allocation to Risky Assets
Capital Allocation to Risky Assets
Portfolio Theory & Related Topics
6 Efficient Diversification Bodie, Kane and Marcus
Portfolio Construction
The Capital Asset Pricing Model (CAPM)
Optimal Risky Portfolios
Capital Allocation to Risky Assets
Capital Allocation Between The Risky And The Risk-Free Asset
2. Building efficient portfolios
Figure 6.1 Risk as Function of Number of Stocks in Portfolio
Presentation transcript:

The Capital Markets: Portfolio Construction In Practice Prof. Ian Giddy New York University New York University/ING Barings

Copyright ©1998 Ian H. Giddy Bonds 2 The Risk-Return Trade-Off CAPITAL ALLOCATION LINE E(R) SD SLOPE IS THE RISK-RETURN TRADE-OFF 12% 14% 20%24% 0% 5%

Copyright ©1998 Ian H. Giddy Bonds 3 The Risk-Return Trade-Off E(R) SD 12% 14% 20%26% If this is my indifference curve then that’s the portfolio I would pick 0% 5%

Copyright ©1998 Ian H. Giddy Bonds 4 Capital Allocation Possibilities: Treasuries or an Equity Fund? r f =7% E(r S ) =17%  S =27% 10% S Expected Return Risk 7% THE EQUITY FUND TREASURIES

Copyright ©1998 Ian H. Giddy Bonds 5 Capital Allocation Possibilities: Treasuries or an Equity Fund? C.A.L. SLOPE=0.37 E(R) SD 17% 14% 18.9%27% ONE PORTFOLIO: 30% Bills, 70% Fund E(R)=.3X7+.7X17=14% SD=.7X27=18.9% r f =7%

Copyright ©1998 Ian H. Giddy Bonds 6 If E(r S )=15%,  S =22%,r f =7% l Allocate your money between t-bills (y) and a stock fund (1-y). Then: l r p = yr s + (1-y)r f l E(r p )= r f + y[E(r s - r f ] = 7 + y[15 - 7] = 7 + y8  p = y  s = y22

Copyright ©1998 Ian H. Giddy Bonds 7 r f =7% E(r S ) =15%  S =22% 8% S Expected Return Risk 7% We Can Buy Some T-bills and Some of the Risky Fund...

Copyright ©1998 Ian H. Giddy Bonds 8...Or Buy Two Risky Assets A E(r) B

Copyright ©1998 Ian H. Giddy Bonds 9 Portfolio Return... To compute the return of a portfolio: use the weighted average of the returns of all assets in the portfolio, with the weight given each asset calculated as (value of asset)/(value of portfolio). The portfolio return E(R p ) is: E(R p) = (w 1 k 1 )+(w 2 k 2 )+... (w n k n ) =   w j k j where w j = weight of asset j, k j = return on asset j

Copyright ©1998 Ian H. Giddy Bonds 10 Measuring Portfolio Risk The variance of a 2-asset portfolio is: where w A and w B are the weights of A and B in the portfolio.

Copyright ©1998 Ian H. Giddy Bonds 11 Case Study: A Portfolio

Copyright ©1998 Ian H. Giddy Bonds 12 Portfolio Return Computation

Copyright ©1998 Ian H. Giddy Bonds 13 Portfolio Risk Computation

Copyright ©1998 Ian H. Giddy Bonds 14 The Minimum-Variance Frontier of Risky Assets “Efficient frontier” Individual assets Global minimum- variance portfolio E(r)

Copyright ©1998 Ian H. Giddy Bonds 15 Given Return, Find Lowest-Risk Compositions

Copyright ©1998 Ian H. Giddy Bonds 16 Plotting the Efficient Frontier

Copyright ©1998 Ian H. Giddy Bonds 17 The Efficient Frontier of Risky Assets with the Optimal CAL Efficient frontier CAL(P) E(r)

Copyright ©1998 Ian H. Giddy Bonds 18 Optimal Overall Portfolio Indifference curve Opportunity set CALE(r) P Optimal complete portfolio

Copyright ©1998 Ian H. Giddy Bonds 19 Finding the Optimal Portfolio: Computations

Copyright ©1998 Ian H. Giddy Bonds 20

Copyright ©1998 Ian H. Giddy Bonds 21

Copyright ©1998 Ian H. Giddy Bonds 22

Copyright ©1998 Ian H. Giddy Bonds 23 Ian Giddy NYU Stern School of Business Tel ; Fax

Feedback: Privacy Policy Feedback
Do Not Sell My Personal Information
About project: SlidePlayer Terms of Service

© 2025 SlidePlayer.com. Inc. All rights reserved.