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Published byIsaac Jacobs Modified over 9 years ago
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Intermediate Investments F3031 Summary to Date Investing is about measuring and understanding the risk/return relationship Risk –Measured through the use of standard deviation –Controlled through diversification The Capital Allocation Line –The Sharpe Ratio (reward to volatility) –The mean-variance criterion –The optimal risky portfolio –The minimum variance portfolio
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Intermediate Investments F3032 Summary to Date While the return of a portfolio made up of two assets is simply the weighted average, the standard deviation is only a weighted average if the assets are perfectly correlated Otherwise, the standard deviation is something less than the weighted average, showing the benefits of diversification!
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Intermediate Investments F3033 The Optimal Risky Portfolio Optimal Risky Portfolio (p. 200 has an error) W A = (RP A ) * (VAR Z ) – (RP Z )(SD A )(SD B )(Rho AZ ) --------------------------------------------------------------------------- (RP A )*(VAR Z ) + (RP Z )*(VAR A ) -(RP A +RP Z )(SD A )(SD Z )(Rho AZ )
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Intermediate Investments F3034 The Minimum Variance Portfolio Minimum Variance Portfolio (p. 197) W A = (VAR Z ) – (SD A )(SD Z )(Rho AZ ) ------------------------------------------------------ (VAR Z ) + (VAR A ) – 2(SD A )(SD Z )(Rho AZ )
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