{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Note-3 - Optimal Portfolio Problem

Note-3 - Optimal Portfolio Problem - Economics 106V...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Economics 106V Investments : Lecture Note-3 Daisuke Miyakawa UCLA Department of Economics June 27, 2008 3rd lecture covers the following items: (1) The structure of optimal portfolio choice problem, (2) a simple one risk-free asset and one risky asset model, (3) Capital Allocation Lone (CAL) & Capital Market Line (CML), (4) multiple asset model, (5) optimal risky portfolio, (6) global minimum variance portfolio, (7) e¢ cient frontier, and (8) diversi°cation e/ect. After discussing those items, we solve some exercise problems. 1 The Structure of Optimal Portfolio Choice Problem In the previous two lecture, we have studied the tools necessary to discuss the optimal portfolio construction problem. 1.1 Overview Suppose we are asked to construct a portfolio, which is a set of risky assets and risk-free asset. For simplicity, assume that there are only two risky assets and one risk-free asset. Figure-1 summarizes the structure of this problem. Risky Asset-A r A & Risky Asset-B r B & Risky-Free Asset r f & A σ B σ 0 = f σ Step-1: Optimal "Risky" Portfolio Construction Step-2: Optimal Portfolio Construction Figure-1: The Structure of the Problem In order to construct an optimal portfolio, we need to follow the two steps. First, an optimal "risky" portfolio, which consists of only the risky assets, is constructed. Then, we allocates our funds to the risk-free asset and the optimal risky portfolio. Figure-2 is the road map for the material on this lecture. Note that there 1
Background image of page 1

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

View Full Document Right Arrow Icon