7 Optimal Risky Portfolios

# 7 Optimal Risky Portfolios - Optimal Risky Portfolios 1...

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Comm367 1 Optimal Risky Portfolios

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Comm367 2 Chapter Summary Objectives: To examine portfolio risk u Portfolio risk and diversification u The two security portfolio u Extending to n securities u The role of correlation The optimal portfolio u The minimum variance frontier u The minimum variance portfolio u The Capital Allocation Line
Comm367 3 Figure 7.1 Portfolio Risk as a Function of the Number of Stocks in the Portfolio

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Comm367 4 Figure 7.2 Portfolio Diversification
Comm367 5 Table 7.1 Descriptive Statistics for Two Mutual Funds

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Comm367 6 w1 = proportion of funds in Security 1 w2 = proportion of funds in Security 2 r1   = expected return on Security 1 r2   = expected return on Security 2 1 w n 1 i i = = Two-Security Portfolio: Return 2 2 1 1 P r w r w r + =
Comm367 7 σ 12 = variance of Security 1 σ 22 = variance of Security 2 Cov(r1,r2) = covariance of returns for Security 1 and Security 2 Two-Security Portfolio: Risk ) r , r ( Cov w w 2 w w 2 1 2 1 2 2 2 2 2 1 2 1 2 p + σ + σ = σ

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## This note was uploaded on 08/03/2011 for the course ECON 503 taught by Professor Motherfucker during the Spring '11 term at Aarhus Universitet.

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7 Optimal Risky Portfolios - Optimal Risky Portfolios 1...

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