Investments07

Investments07 - Investor Preferences Professor...

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1 Professor Pierre-Olivier Weill Investor Preferences 2 Last time ± Portfolio of two securities ¾ Investment opportunity set: risk return combinations ¾ Backward bending ¾ Diversification ¾ Special cases 9 Correlation is equal to minus one 9 Correlation is equal to plus one ± Principle of dominance ± Investment opportunity set with many assets ¾ Efficient frontier 9 Max expected return for any given level of risk 3 Outline ± Diversification (review) ± Risk-return tradeoff (review) ± Expected utility ± ( σ ,E(R)) diagram ± Indifference curve
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4 Diversification: How is risk reduced? ± Two independent assets/coin flippers – 100% with Proba 0.5 – 0% with Proba 0.5 ± Form a portfolio with equal weights 0%, 0% 100%, 0% 0%, 100% 100%, 100% 5 Risk-Return Tradeoff ± Suppose you could only pick one of the following return patterns: 0 5 10 15 20 25 30 35 40 45 50 -0.1 0 0.1 0.2 0.3 0.4 0.5 0.6 Mean 0.15 0.35 Stdev 0.10 0.10 6 Risk-Return Tradeoff ± Suppose you could only pick one of the following return patterns:
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Investments07 - Investor Preferences Professor...

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