BKM CH6-I

BKM CH6-I - Efficient Diversification Chapter 6 Part I 6-2...

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Unformatted text preview: Efficient Diversification Chapter 6 Part I 6-2 Learning Objectives Learn how covariance and correlation affect the power of diversification to reduce portfolio risk Construct efficient portfolios Calculate the composition of the optimal risky portfolio 6-3 Diversification and Portfolio Risk In the early 1950s, professor Harry Markowitz was the first to examine the role and impact of diversification Market risk Systematic or Nondiversifiable Firm-specific risk Diversifiable or nonsystematic 6-4 Portfolio Risk as a Function of # of Stocks 6-5 Portfolio Risk as a Function of # of Stocks 6-6 Asset Allocation with Two Risky Assets Risky Portfolio of 60% in stocks and 40% in bonds: Capital market expectations XLS 6.1 Variance of returns XLS 6.2 Performance of the portfolio XLS 6.3 Covariance XLS 6.4 6-7 Two Asset Portfolio Return Stock and Bond R eturn Stock ht Stock W eig R eturn B ond W eight B ond R eturn Portfolio r w r w r S S B B p = = = = = + = r w r w r S S B B p 6-8...
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This note was uploaded on 04/16/2008 for the course FI 320 taught by Professor Erhemjamts during the Spring '08 term at Bentley.

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BKM CH6-I - Efficient Diversification Chapter 6 Part I 6-2...

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