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KIC000018

# 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 III bft\ F, \$h1N~ The Normal Distribution • Suppose a stock has E(R) = 12.5% and IT = 20.4%. Then,

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KIC000018 - The Normal Distribution Histograms ofRetums on...

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