Topic 5A. InvestorPreferencePortfolio_Brailsford_4e_PP_07_Chapter.7.pptx

Topic 5A. InvestorPreferencePortfolio_Brailsford_4e_PP_07_Chapter.7.pptx

Info icon This preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Image of page 1

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

View Full Document Right Arrow Icon
2 Chapter 7 Investor preferences and portfolio concepts
Image of page 2
3 Learning objectives After completion of this chapter you should be able to: understand the importance of portfolio diversification in investment decision making understand the mean variance opportunity set describe portfolio construction methods
Image of page 3

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

View Full Document Right Arrow Icon
4 Chapter outline 1 Introduction 2 Benefits of diversification 3 Mean-variance opportunity set 4 Risk-free assets 5 Summary
Image of page 4
5 Risk-free assets Return is certain across all possible states of the world. Choice is simply between consumption now and later Risky assets Return is not certain across all possible states of the world. The range of future cash flows will impact on wealth. Investor preference theory - assumes investors are risk averse, rational and have unlimited demand (non-satiated). Risk aversion is a dislike of increased risk, i.e. for a given level of return a risk averse investor will choose investment with lower risk. Rational Investors can consistently rank investments. Non-satiated Investors prefer more to less. 1 Introduction
Image of page 5

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

View Full Document Right Arrow Icon
6 Variance of portfolio may be less than variance of individual assets. As portfolio increases the covariance becomes more important, individual asset variance less important Portfolio mean: 2 Benefits of diversification p 1 1 n n N i i i=1 E(R ) = w E(R )+...+w E(R ) = w E(R )
Image of page 6
7 Portfolio variance is a weighted sum of the covariance and the variance terms associated with the assets in the portfolio. 2 Benefits of diversification i j N N 2 p i j i,j i=1 j=1 N N N 2 2 i,j i,j i=1 i¹j j=1 σ = w w Cov = w Cov  
Image of page 7

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

View Full Document Right Arrow Icon
8 Example: Consider two assets, Air New Zealand (AIZ) and Qantas Airways (QAN), with a covariance of 0.0025, and the following expected returns and variances: If a portfolio is formed comprising 25% in AIZ (hence, 100%-25% = 75% in QAN), what is the expected return and variance of this portfolio?
Image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern