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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 (nonperfectly 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 riskfree asset: & Meanstandard 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 riskfree asset ( same lending rate and borrowing rate): & E¢ cient frontier: line connecting tangency portfolio with riskfree 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....
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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.
 Fall '08
 SZEIDL
 Economics

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