321_8 - • Portfolio = a collection of assets/investments...

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ECON 321 Spring 2011: Lecture 8 Chapter 13: Risky Assets
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Announcements Exam 1 is in 2 weeks: Wednesday, February 23 rd covering all material up through Equilibrium. Practice Exam Materials are posted on aplia because blackboard is down. Multiple choice questions Last Fall’s Midterm 1 This exam will be: 20 multiple choice at 3 points each = 60 points 4 Long Answer questions (like last fall’s) worth 10 points each = 40 points
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Definitions Risky asset = an asset with an uncertain return (like a stock) Risk-free asset = an asset with a certain return (like an FDIC insured deposit or a T-bill) Mean = average of a probability distribution = expected value Variance ( σ 2 ) = spread of the probability distribution = a measure of riskiness Standard Deviation ( σ ) = Square root of the variance
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Unformatted text preview: • Portfolio = a collection of assets/investments Practice Problem • I have a risky asset available with r m = 0.2, r f =0.1 and σ m = 0.1, and suppose I borrow against all my money and put 200% of my money in the risky asset. – What is the expected return of my portfolio? – What is the standard deviation of my portfolio? – What is my portfolio budget line? Same setup: r m = 0.2, r f =0.1 and σ m = 0.1 • Suppose I have utility: – How much of the risky asset will I buy? • Which of the following assets would be better than my initial asset above? (assume you can only buy one at a time) x x x x r r u σ 2 ) , (-=...
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This note was uploaded on 06/16/2011 for the course ECON 321 taught by Professor Murray during the Spring '11 term at South Carolina.

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321_8 - • Portfolio = a collection of assets/investments...

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