MGMT310_lecture14

MGMT310_lecture14 - Review ReviewQuestions 1. Suppose a...

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eview Questions Review Questions 1. Suppose a portfolio has a positive investment in each of assets A, B, and C. a) Can the expected return on the portfolio be less than that on every asset in the portfolio? b) Can the standard deviation of the portfolio be less than at n very sset e ortfolio? that on every asset in the portfolio?
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apital market line Capital market line Last time, we plotted all possible combinations of all risky assets Then we drew the efficient frontier i.e., the set of securities w/ highest expected return for given level of risk, or equivalently, the set w/ lowest risk for given level of expected return Now let’s introduce a riskless asset to our plot…
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ortfolio risk and diversification Portfolio risk and diversification Companies are generally positively correlated Can’t make risk completely disappear through diversification
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hat type of risk atters? What type of risk matters? Recall portfolio variance with n assets: nn n 22 2 p ii i j ij 1 i1ji1 w2 w w C o v    If all the weights are equal, we see that all w i 's = 1/n i1  Suppose you have a well diversified portfolio (say, n  stocks) As n , becomes negligible (i.e., approaches 0) n i w
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iversifiable versus non iversifiable risk Diversifiable versus non diversifiable risk Total risk the variance (or the standard deviation) of an asset’s return is comprised of: Diversifiable Risk KA firm specific risk unique risk idiosyncratic risk non stematic risk AKA : firm specific risk, unique risk, idiosyncratic risk, non systematic risk A risk that affects single assets or small groups of assets Can be largely diversified away by holding in a portfolio Non diversifiable risk AKA : market risk, systematic risk A risk that affects almost all assets to some degree
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MGMT310_lecture14 - Review ReviewQuestions 1. Suppose a...

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