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

2. © 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 20400 1 2... C

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

4. © K. Cuthbertson and D. Nitzsche Figure 10.3 : Efficient frontier 1, 0 0, 1 0.5, 0.5 0.75, 0.25

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

6. © 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

7. © K. Cuthbertson and D. Nitzsche Figure 10.6 : Transformation line : 1 riskless + 1 risky asset All lending No borrowing/ no lending 0.5 lending + 0.5 in 1 risky bundle -0.5 borrowing + 1.5 in 1 risky bundle

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

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

10. © 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

11. © K. Cuthbertson and D. Nitzsche Figure 10.10 : 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

12. © K. Cuthbertson and D. Nitzsche Figure 10.11 : Security market line (SML) Expected return and actual return SML Beta,  i Q (buy) S (sell) P actual return expected return 0.511.2 T (sell) M The larger is  i, the larger is ER i r

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

14. © K. Cuthbertson and D. Nitzsche Figure 10.6 : Transformation line : 1 riskless + 1 risky asset All lending No borrowing/ no lending 0.5 lending + 0.5 in 1 risky bundle -0.5 borrowing + 1.5 in 1 risky bundle