EC3333 Notes02 - Lecture 2 Optimal Risky Portfolios...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Lecture 2 Optimal Risky Portfolios
Background image of page 1

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

View Full DocumentRight Arrow Icon
Two-Security Portfolio: Return Portfolio Return Bond Weight Bond Return Equity Weight Equity Return p DE P D D E E r r w r w r ww rr =+ = = = = = () ( ) p DD EE Er w wEr = +
Background image of page 2
= Variance of Security D = Variance of Security E = Covariance of returns for Security D and Security E Two-Security Portfolio: Risk 2 D σ 2 E (, ) D E Cov r r ) , ( 2 2 2 2 2 2 E D E D E E D D p r r Cov w w w w + + = σσ
Background image of page 3

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

View Full DocumentRight Arrow Icon
Covariance = = = n s EY s Y EX s X s p Y X E Y X Cov 1 ) ) ( )( ) ( ( ) ( ) , ( 2 2 ) ( ) ( ) , ( X X E X X E X X σ = = =
Background image of page 4
ρ DE = Correlation coefficient of returns ρ DE = Cov(r D, r E ) /( σ D σ E ) σ D = Standard deviation of returns for Security D σ E = Standard deviation of returns for Security E Correlation
Background image of page 5

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

View Full DocumentRight Arrow Icon
Covariance and Correlation y Covariance and the correlation coefficient provide a measure of the way that the returns of two assets vary together y Portfolio risk depends on the correlation between the returns of the assets in the portfolio 2 (,) ( ,)2 P DD EE DE wwCovr r wwCovr r wwCovr r σ =+ +
Background image of page 6
Range of values for ρ 1,2 + 1.0 > ρ > -1.0 If ρ = 1.0, the securities would be perfectly positively correlated If
Background image of page 7

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

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/30/2011 for the course ECON EC3333 taught by Professor Lu during the Spring '11 term at National University of Singapore.

Page1 / 28

EC3333 Notes02 - Lecture 2 Optimal Risky Portfolios...

This preview shows document pages 1 - 8. Sign up to view the full document.

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