of Foundations Finance: Asset Allocation: Risky vs. Riskless
Prof. Alex Shapiro
Lecture Notes 6
Asset Allocation: Risky vs. Riskless
I.
Readings and Suggested Practice Problems
II. Expected Portfolio Return: General Formula
III. Standard Deviation of Portfolio Return:
One Risky Asset and a Riskless Asset
IV. The Asset Allocation Framework
V.
The Capital Allocation Line
VI. Portfolio Management:
One Risky Asset and a Riskless Asset
VII. Additional Readings
Buzz Words:
Reward to Variability Ratio, Separation Theorem,
Portfolios Risk Adjustment, Portfolio Management
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Foundations of Finance: Asset Allocation: Risky vs. Riskles
I.
Readings and Suggested Practice Problems
BKM, Chapter 7
Suggested Chapter Problems, 7: 8, 18-23.
A useful example from the Additional Readings:
Investment Advice from Wall Street
Two annual recommendations from Morgan Stanley (as reported in the WSJ)
Stocks
Bonds
Cash
% in Complete Port.
[% in the risky part]
% in Complete Port.
[% in the risky part]
% in Comp
Year 1
65
[81.25]
15
[18.75]
20
Year 2
80
[80]
20
[20]
0
In this and subsequent lectures, we want to understand:
- How to chose the relative weights, in [brackets] above, of Stocks and
Bonds (or any other two risky assets that make up the risky portion of
your complete portfolio).
- What is the role of Cash (i.e., the riskless asset within the portfolio,
such as a money market account).
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