Lecture #19 - Ec 136, Financial Economics Lecture 19...

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Ec 136, Financial Economics Lecture 19 November 10
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Outline for today 1. Mean-stdev frontier with many risky assets 2. Optimal portfolio with many risky assets 3. CAPM: introduction 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) Problem set 6 : due November 12, Thurs, in class.
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1. Frontier w/ many risky assets & Two risky assets = ) cup-shaped region. { Similar shape with may risky assets. & Now add safe asset: { Combining R f with risky portfolio R p , can travel along straight line connecting them { Slope is Sharpe ratio: S p = E R p ± R f & p & Tangency portfolio: where best straight line meets mean-stdev frontier of risky assets. { Has highest Sharpe-ratio & Global e&cient frontier: line connecting R f and tangency portfolio.
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Slope is “Sharpe Ratio” Tangency Portfolio Risky Asset Frontier σ f R R
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2. Optimal portfolio & Optimal portfolio: &nd best combination of R f and T just like with only two assets w 1 = E R T ± R f A& 2 T : & Principle of participation: if E R T ± R f > 0, should hold some stocks.
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This note was uploaded on 09/02/2010 for the course ECON 136 taught by Professor Szeidl during the Fall '08 term at University of California, Berkeley.

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Lecture #19 - Ec 136, Financial Economics Lecture 19...

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