F420-5 - Click to edit Master subtitle style BUS-F420...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Click to edit Master subtitle style BUS-F420 International Diversification January 27, 2011 Today: Quick review of Markowitz Portfolio Selection Model International Diversification: Background Risk Factors Benefits of International Diversification? International Diversification: Background Markowitz Portfolio Selection Model Step 1: Determine the Risk-Return opportunities Markowitz Portfolio Selection Model Step 1: Determine the Risk-Return opportunities Q: How Do I form the efficient frontier using two risky assets? A: Vary weights w1 and w2 = (1-w1) and solve for: E(rp)= w1E(r1) + w2E(r2) p2 = w1212 + w2222 +2w1w212 The efficient frontier is everything above the portfolio with the minimum variance. Markowitz Portfolio Selection Model Step 1: Determine the Risk-Return opportunities With two risky assets, the weights for the minimum-variance portfolio are: Where does this come from? Markowitz Portfolio Selection Model Step 1: Determine the Risk-Return opportunities Whare are the weights for the min-var portfolio of Apple and ExxonMobil?: 22 - 12 = 2.19%, 12 + 22 -212 = 2.34%, So, w1 = 2.19 / 2.34 = 0.936 and w2 = 0.064 which gives P2 = 0.27% covar xom aapl xom 0.28% 0.13% aapl 0.13% 2.32% Markowitz Portfolio Selection Model 1. Pick an E(r), say 5%, for example 1. Minimize (w1, w2, wn) using constraints: and When there are more than two assets, you could solve by hand, but its more practical to use a computer Markowitz Portfolio Selection Model Step 1: Determine the Risk-Return opportunities 3. Do the same variance minimization for a wide range of E(r). Markowitz Portfolio Selection Model Step 2: Find the CAL with the highest Sharpe Ratio Markowitz Portfolio Selection Model Step 3: Find the optimal mix of the risk free asset and P...
View Full Document

Page1 / 48

F420-5 - Click to edit Master subtitle style BUS-F420...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online