Section 10 - ECON 136 Financial Economics Section 10(Nov 6th Xing Huang 1 Economics Department UC Berkeley 1 Review 1.1 Rules of portfolio

Info iconThis preview shows pages 1–3. 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
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ECON 136: Financial Economics Section 10 (Nov 6th) Xing Huang 1 Economics Department, UC Berkeley 1 Review 1.1 Rules of portfolio arithmetic & R p = w 1 R 1 + w 2 R 2 & E [ R p ] = w 1 E [ R 1 ] + w 2 E [ R 2 ] & V ar [ R p ] = w 2 1 V ar [ R 1 ] + w 2 2 V ar [ R 2 ] + 2 w 1 w 2 Cov [ R 1 ; R 2 ] 1.2 Diversi&cation & Principle of diversi&cation: When you hold many (non-perfectly correlated) assets in a port- folio, you could lessen your exposure to any one of them. If a world with many risky assets, but no risk-free asset: & Mean-standard deviation frontier: A graph of the feasible investments (the investment op- portunity set) with the highest and lowest possible expected returns for all possible portfolio standard deviations & E¢ cient frontier: a graph of the feasible investments with the highest expected returns for all possible portfolio standard deviations 1 These notes are enormously bene&ted from previous GSIs: Keith Jacks Gamble, Dan Hartley and Congyan Tan. Thank you all very much !! 1 Now consider a world with many risky assets and one risk-free asset ( same lending rate and borrowing rate): & E¢ cient frontier: line connecting tangency portfolio with risk-free asset. & Mutual Fund Theorem: All investors should hold risky assets in the same proportions com- bined with some percentage of risk free asset.bined with some percentage of risk free asset....
View Full Document

This note was uploaded on 01/25/2010 for the course ECON 136 taught by Professor Szeidl during the Fall '08 term at University of California, Berkeley.

Page1 / 3

Section 10 - ECON 136 Financial Economics Section 10(Nov 6th Xing Huang 1 Economics Department UC Berkeley 1 Review 1.1 Rules of portfolio

This preview shows document pages 1 - 3. Sign up to view the full document.

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