Concepts Checks 2 - Concepts Checks 2 Portfolio Theory...

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Unformatted text preview: Concepts Checks 2 Portfolio Theory Definitions & Notation Notation: P: A risky portfolio, consisting of 1 or more risky assets f: A risk-free asset C: A complete portfolio, consisting of a percentage investment allocation y in a risky portfolio P and a percentage investment allocation (1 y) in the risk-free asset f. Definitions & Notation - 2 Expected Returns & Risk The expected return of the risk-free asset f is a certain return & is denoted r f The expected return of the risky portfolio P is denoted by E(r P ) with risk P Observe that E(r P ) = r f + (E(r P ) r f ) The term (E(r P ) r f ) is the risk premium for portfolio P The expected return of the Complete portfolio C is denoted by E(r C ) with risk C Observe that E(r C ) = r f + y (E(r P ) r f ) The term y (E(r P ) r f ) is the risk premium for the complete portfolio C Concepts & Definitions The Capital Allocation Line (CAL) shows the combinations of risk & return that are possible...
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This note was uploaded on 09/27/2010 for the course BUSINESS 6F:111 taught by Professor Tongyao during the Spring '09 term at University of Iowa.

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Concepts Checks 2 - Concepts Checks 2 Portfolio Theory...

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