L6 - Ch6. Efficient Diversification Covariance and...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Investment Analysis: Prof. Peng 1 Ch6. Efficient Diversification Covariance and Portfolio Risk Efficient Portfolios Efficient Frontier with Riskfree Asset Optimal Capital Allocation Line Investment Analysis: Prof. Peng 2 Diversification and Portfolio Risk ± “Don’t put all your eggs in one basket” ± Effect of portfolio diversification # of securities in the portfolio σ 5 10 15 20 Diversifiable risk, non-systematic risk, firm-specific risk, idiosyncratic risk Non-diversifiable risk, systematic risk, market risk, covariance risk
Background image of page 1

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

View Full DocumentRight Arrow Icon
2 Investment Analysis: Prof. Peng 3 Diversification and Portfolio Risk ± Covariance and correlation ¾ Degree of co-movement of two stocks ¾ Covariance: non-standardized measure ¾ Correlation coefficient: standardized measure r 1 r 2 r 1 r 2 r 1 r 2 0< 0< ρ 12 <1 -1< 1< 12 12 <0 12 12 =0 2 1 2 1 2 2 1 1 2 1 ] [ )] )( [( ] , [ μ = = r r E r r E r r Cov 1 1 and ] , [ ] , [ 12 2 1 12 2 1 2 1 2 1 12 = = σ r r Cov r r Cov Investment Analysis: Prof. Peng 4 3 rules of 2-risky-assets portfolios ± Portfolio return is a weighted average of individual returns ¾ w 1 : proportion invested in asset 1 (e.g. bond) ¾ w 2 : proportion invested in asset 2 (e.g. stock) ± Portfolio expected return is a weighted average of individual expected returns ± Variance 1 and 2 1 2 2 1 1 = + + = w w r w r w r p ] [ ] [ ] [ 2 2 1 1 r E w r E w r E p p + = = ) , cov( 2 2 2 1 2 1 2 2 2 2 2 1 2 1 2 1 12 2 1 2 2 2 2 2 1 2 1 2 r r w w w w w w w w p + + = + + =
Background image of page 2
3 Investment Analysis: Prof. Peng 5 Diversification and Portfolio Risk ± Example: Portfolio of two risk securities ¾ 50%
Background image of page 3

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

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/26/2011 for the course ECO 220 taught by Professor Huang during the Spring '08 term at CUNY Hunter.

Page1 / 9

L6 - Ch6. Efficient Diversification Covariance and...

This preview shows document pages 1 - 4. Sign up to view the full document.

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