Lecture #17 - Ec 136, Financial Economics Lecture 17...

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Ec 136, Financial Economics Lecture 17 October 29
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Outline for today 1. Mean-variance optimization 2. Capital allocation line 3. Optimal portfolio with one risky asset www.econ.berkeley.edu/~szeidl/ec136/ec136index.htm Readings: BKM Chapters 6, 7, 8.1-8.2 (6 and 7.1, 7.2 in editions 7&8)
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0. Midterm Same format as sample midterm. Bring: 1. a calculator, 2. two two-sided 8 : 5 ± 11 sheets with handwritten formulas/notes, 3. as many blue books as you think you need. Priorities for preparation: 1. Lecture notes. 2. BKM text. Please be on time.
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1. Mean-variance optimization Mean-variance objective function E h f W i ± k ² Var h f W i : For gamble W 0 ³ h w/ prob 1 = 2, we have E f W = W 0 and var f W = h 2 , so E h f W i ± k ² Var h f W i = W 0 ± kh 2 : { k is interpreted as a measure of risk aversion : When investing in a portfolio, use max E [ R p ] ± 1 2 A ² Var [ R p ] : R p is portfolio return, A is risk aversion.
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Rules of portfolio arithmetic Rules to compute variance:
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Lecture #17 - Ec 136, Financial Economics Lecture 17...

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