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Topic 5b RiskReturn - Topic5b:Risk&Return FIN4504...

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Topic 5b: Risk & Return FIN 4504 Aaron Gubin
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Portfolio Theory • Risk and Return – Return – Risk – Asset Allocation • Efficient Diversification • CAPM and APT • The Efficient Market Hypothesis – Market efficiency – Anomalies
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Quantifying Risk
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Risk and Risk Premium Risk Premium: Expected return in excess of  that on risk-free securities.
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Asset Allocation • “The most fundamental decision in investing is the allocation of assets:  How much should you own in stocks? How much should you own in  bonds?”   John C. Bogle,  Bogle on Mutual Funds , 1994, pg. 235 • Objectives: •Find the risk-return combinations available by investing in a risky portfolio  and a risk-free one.  •Demonstrate how different degrees of risk aversion affect the allocation  choice.
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Portfolio Expected Return and Risk For two assets: ( ) . ( ) . ( ) A A B B E r w E r w E r = + 2 2 2 ( . ) ( . ) 2.( . ).( . ).
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