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Unformatted text preview: 11. CAPM (continued) In these slides, we go into more detail about the CAPM , including a discussion of the efficient frontier . Getting started... Begin by reviewing the first several slides from the previous lecture. Recall that we supposed the existence of two possible assets avail able to invest in, A and B : the expected return of A is E ( R A ) and the standard devia tion is A . the expected return of B is E ( R B ) and the standard devia tion is B . the correlation between the returns of A and B is . The portfolio with weights w A invested in asset A and w b invested in asset B has expected return E ( R p ) = w A E ( R A ) + w B E ( R B ) and variance 2 p = w 2 A 2 A + w 2 B 2 B + 2 w A w B A B 2 Draw figure of feasible set with two assets. 3 Constructing portfolios continued Now lets expand the set of possible assets. Suppose there are n risky assets. Risky asset i has expected return E ( R i ) and standard deviation i , and the correlation between assets i and j is ij . Suppose we form a portfolio with fraction w i of our invest ment in asset i where n i =1 w i = 1 . Then E ( R p ) = n summationdisplay...
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This note was uploaded on 03/31/2008 for the course FNCE 3010 taught by Professor Donchez,ro during the Fall '07 term at Colorado.
 Fall '07
 DONCHEZ,RO
 Corporate Finance

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