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CH 11 - 172a

# CH 11 - 172a - Hard to compute STD = Sigma(Ri = Sigma I =...

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CH 11 Portfolio Diversification E(R) IND, SEC Portfolio Diversification Covariance Corr. Coeff. Pi, Optimal Portfolio Markowitz Many lose money because they are not diversified enough. Ps A B P 60%A, 40%B High Growth 0.3 0.17 0.01 10.6% Normal Growth 0.5 0.1 0.08 9.2% Recession 0.2 -0.02 0.16 5.2% E(R) 9.7% 7.5% 8.82% Sigma^2 0.00434281 0.00272484 0.00036 Sigma 6.59 5.22% 1.897% Procyclicle – move with the change of the market Concyclicle – Move opposite to the market. E(R) = E(Ri) = sum of all Ps X Ri,s Variance = Sigma^2(Ri) = Sigmai^2 = summations of Ps X [Ri,s – E(Ri)]^2
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Unformatted text preview: Hard to compute STD = Sigma(Ri) = Sigma I = squire root of variance Interpretation the unit of measure - % Find the P E(Ri) = summation of Ps X Ri,s E(Rp) = summation of Ps X Rp,s E(Rp) = Summation of Wi X E(Ri) = [Wa X E(Ra)]+[Wb X E(Rb)] Rp,1 = (0.6 X .17) + (0.4 X 0.01) = 10.6% Rp,2 = (0.6 X .1) + (0.4 X 0.08) = 9.2% Rp,3 = (0.6 X -0.02) + (0.4 X 0.16) = 5.2% The STD of P of 1.897% shows that diversification give less risk than any of the individual stocks....
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