Week 2_Risk and Return

# Week 2_Risk and Return - Risk and Return Portfolio...

This preview shows pages 1–10. Sign up to view the full content.

Risk and Return Portfolio Optimization

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
2 Last Time ± Developed ways of measuring ² Risk (variance or standard deviation) ² Return (average return) ² How investments move together (covariance or correlation) ± Now we want to use these estimates to build collections of investments that achieve optimal performance ² Diversified portfolios
3 Calculating returns ± Discrete period returns (PR) ± Continuously compounded return (CCR) + = + = 0 0 1 1 0 1 1 1 P P D P P D P PR + = 0 1 1 ln P D P CCR

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
4 Time weighted averages Arithmetic: Sum of the returns in each period divided by the number of periods Geometric: ± add 1 to each return ± multiply the series ± take the n th root ± subtract 1 = n t t r 1 = r * 1 n () + = n t t r 1 1 n 1 1 = G r
5 Risk ± Deviations from expectation ² Variance/standard deviation 0 0.05 0.1 0.15 0.2 0 5 10 15 20 Return (%) Probability σ B =4% σ A =2% E(R A ) = E(R B ) = 10%

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
6 Portfolio Risk Standard Deviation Number of stocks Systematic (market) risk Non-systematic (firm-specific) risk
7 Portfolio Risk ± Diversification benefit depends on covariance. ² Smaller correlation leads to greater benefit. ² Benefit exists when Cor(r A ,r B ) < 1. ± Let w i = 1/n, Average σ 2 = ( ∑σ i 2 )/n, and Average Cov = ∑∑ Cov(r i ,r j )/[n(n-1)]. ± Then since σ 2 = Ave σ 2 /n + (n-1)/n AveCov as n →∞ , σ 2 AveCov . == σ= σ + ∑∑ nn 22 2 2 Pi i j i1 i1ji nC o v ( r , r ) n

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
8 Text reference ± This week’s lecture: Chapters 6 & 7 ² Tutorial problems due this week: ± Ch3: 4-6,10,12 ± Ch5: 2,4,6-9; CFA: 1-7 ± Ch24: 4 ± Next week’s lecture: Chapter 8 ² Tutorial problems due next week: ± Ch6: 1-19,26-28, CFA: 1-9 ± Ch7: 1-11,13-19, CFA: 4-13
9 Today ± Utility ± Mean-variance analysis ± Capital allocation between risky and risk-free assets ±

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 05/02/2010 for the course ACCT 3756 taught by Professor Leung during the Three '09 term at University of Sydney.

### Page1 / 35

Week 2_Risk and Return - Risk and Return Portfolio...

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online