1. Portfolio Theory & Related Topics

2. Some Basic Ideas
Return
Risk
Risk Free Rate
Utility Function

3. Vi Vf
Time
Return (for a given holding period) = (Vf – Vi) / Vi
More generally
V V V Vi
Vi Vn
Return = Ri+1 = (Vi Vi)/ Vi

4. V V V Vi
Vi Vn
Return = Ri+1 = (Vi Vi)/ Vi
Expected Return = E(R) ~
St. Deviation can be estimated as =

5. V V V Vi
Vi Vn
Vn – V1 = V1 ( 1 + g) (n-1)
Geometric average (GEOMEAN)

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

7. 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

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