27.rho_short_sales

27.rho_short_sales - University of California, Los Angeles...

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Unformatted text preview: University of California, Los Angeles Department of Statistics Statistics C183/C283 Instructor: Nicolas Christou Constructing the optimal portfolios - Constant correlation model Short sales allowed The calculation of optimal portfolios is simplified by using the constant correlatation model to rank securities based on the excess return to standard deviation ratio. Excess return to standard deviation = R i- R f i . After stocks are ranked using the above ratio the optimum portfolio (point of tangency) consists of investing in all stocks: Those for which the excess return to beta is greater than the cut-off point C * will be held long. Those for which the excess return to beta is smaller than the cut-off point C * will be held short. This cut-off point is computed as follows: C * = 1- + N N X j =1 R j- R f j where R j Expected return on stock j . R f Return on a riskless asset....
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This note was uploaded on 06/02/2011 for the course STATS 183 taught by Professor Nicolas during the Spring '11 term at UCLA.

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27.rho_short_sales - University of California, Los Angeles...

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