Chap006 - Chapter6 Chapter Efficient Diversification 1

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Chapter Chapter  6  6 Efficient Diversification 1
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    Risk and Return Risk and Return In previous chapters, we have calculated returns  on various investments. In chapter 5, we used the standard deviation of  returns as a measure of total risk.  Now, we look at what happens to  returns  and  risk  when assets are combined into  portfolios . 2
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    Portfolio Returns Portfolio Returns The return on a portfolio is a  weighted average  of the returns on the assets in the portfolio. If 2 or more assets with equal expected returns  are combined, the expected return on the  portfolio equals the expected return of the  individual assets. 3
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    Portfolio Risk Portfolio Risk In general, the risk (standard deviation) of a  portfolio is  lower   than the risk of the individual  assets. This reduction in risk is referred to as  diversification . Diversification can reduce risk, but cannot 
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This note was uploaded on 10/22/2010 for the course FIN 331 taught by Professor Pinto,k during the Fall '08 term at N. Arizona.

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Chap006 - Chapter6 Chapter Efficient Diversification 1

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