BKM CH6-II

BKM CH6-II - Efficient Diversification Chapter 6 Part II...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Efficient Diversification Chapter 6 Part II 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 Extending to Include Riskless Asset Use data from Spreadsheet 6.5 where: = 0.2 Then add a riskless asset: T-bill with rate of 5% We can draw different CALs A: 87.06% in bonds, 12.94% in stocks B: 80% in bonds, 20% in stocks We can compare the Sharpe ratios Portfolio B dominates. Why? 6-4 Opportunity Set Using Stock and Bonds 6-5 Dominant CAL with a Risk-Free Investment (F) We can find the tangency portfolio (O) CAL O dominates other CALs -- it has the best risk/return or the largest slope [ E(R O ) - R f ) / O ] [ E(R A ) - R f ) / ] Regardless of risk preferences, combinations of O & F dominate 6-6 Optimal Capital Allocation Line for Bonds, Stocks and T-Bills 6-7 The Optimal Risky Portfolio The weights (w S , w B ) can be obtained algebraically from maximizing the reward-to- variability ratio ( 29 ( 29 ( 29 ( 29 ( 29 BS S B f S f B B f S S f B BS S B f S S f B B r r E r r...
View Full Document

Page1 / 25

BKM CH6-II - Efficient Diversification Chapter 6 Part II...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online