ECON 1723 Fall 2013 Section 2 - Economics 1723 Section 2...

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1 Economics 1723: Section 2 Notes Today’s Plan: Review of Concepts (15 minutes) Mean-Variance Analysis (25 minutes) Review Problem (15 minutes) 1. Concept reviews: complete markets, Arrow-Debreu securities2. Mean-Variance Analysis with Two Risky Assets 2.1 Setting: the Mean-Variance Space The basic question behind the mean-variance analysis is: How much risk should an investor take? What is the optimal portfolio allocation, as a trade-off between return and volatility? Question 1: Why typical investors dislike volatility? Can you give a counter-example? We usually use the mean-variance space to facilitate our analysis (please draw it here together with the TF): 2.2 Mean-Variance Analysis with Two Risky Assets

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