Risk and Return - the sea I can construct even worse...

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Risk and Return Now let me move on to risk and return proper. .. "State of the World" Universal Utility Mega Manufacturing Exciting Exports Startup Semiconductor HH +20% +40% +40% +20% HT +0% +10% +50% -20% TH +10% +10% -30% -20% TT -10% -20% -20% +20% Suppose I am choosing portfolios from Mega Manufacturing and Startup Semiconductor: I get the highest return from Mega Manufacturing, but I can get a lower standard deviation--at not much cost in return--by starting to diversify. Suppose I diversify among the four different stocks:
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I can construct a large number of truly, truly putrid portfolios (in fact, by throwing money into
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Unformatted text preview: the sea I can construct even worse portfolios. ..) I can also get outside the frontier of the parallelogram defined by the risk/return characteristics of the individual stocks. .. Introducing lending and borrowing: Choose the portfolio S that just touches the line that goes through the riskfree-rate point and lies entirely to one side of the feasible portfolio set. Then borrow (and lend) until you get to the risk-return characteristics you want. .. Capital asset pricing model. .. ÿ...
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This note was uploaded on 11/10/2011 for the course GEB GEB1011 taught by Professor Henn during the Fall '10 term at Broward College.

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Risk and Return - the sea I can construct even worse...

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