Investments06

Investments06 - Portfolio Selection with Two Risky...

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1 Professor Pierre-Olivier Weill Portfolio Selection with Two Risky Securities 2 Last time ± Representing risk – random variables ± Probability distribution – Discrete or continuous ± Useful summary numbers – Expected value – Variance – Covariance 3 Outline ± Expected Return and Standard Deviation ± Diversification ± Investment opportunity set ± Investor preference: risk-return tradeoff ± Optimal portfolio choice with 2 risky assets
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4 Review: a portfolio ± A combination of N assets, with returns R 1 ,…, R N . ± Portfolio p , with portfolio weights ω 1 ,…, ω N : ω i is percentage of wealth invested in asset i: 5 Portfolio Return and Portfolio Expected Return ± The return on the portfolio is: ± The expected return on the portfolio is: = = N i i i p R R 1 ω = = N i i i p R E R E 1 ) ( ) ( 6 Portfolio Variance and SD
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7 Portfolio Variance and SD ± With 2 securities (N=2), the portfolio variance is: O In general, the portfolio variance is: O The standard deviation of the portfolio is: 2
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This note was uploaded on 02/04/2010 for the course ECON 106v taught by Professor Miyakawa during the Spring '08 term at UCLA.

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Investments06 - Portfolio Selection with Two Risky...

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