KIC000018 - The Normal Distribution Histograms ofRetums on...

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Histograms ofRetums on IBM and John Deere 0 I s l It: It: .~ '~~~ I I , v"JJJi. iJ I- .R 0 nhVh V, '0/771 DE " " .31.10% .~ .JSJMI% .'7.50% . . ¥. 'I'.Y"'k 15.IlIl% 2l.5O% liD"' "I ........ Asset Allocation Asset allocation involves two fundamental steps: o Choose the optimal combination of risky assets 8 Mix this risky portfolio with the riskfree asset to achieve the desired level expected return and risk The amounts allocated between these two asset classes depends upon the extent of risk aversion of the investor. An extremely risk-averse person would put most of their money in the risk-free asset. The investor's entire ~~ng risk-free and risky assets is called the I portfolio. ron M Capital Allocation Line The slope of the CAL measures the excess return being earned per unit of volatility. In our present example, the slope is E{Rp)-R f 15-7 _~"'--~ = -- = .36 Up 22 ~ ~tO-riSk ratio" is commonly referred to as the . ratio. \II
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This note was uploaded on 09/07/2011 for the course FINANCE 320 taught by Professor Sapp during the Fall '10 term at Iowa State.

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KIC000018 - The Normal Distribution Histograms ofRetums on...

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