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Lecture 6 Sep 26 2011

Lecture 6 Sep 26 2011 - FINA FINA3104 Lecture6 DarwinChoi...

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FINA 3104: Investment Analysis and Portfolio Management Lecture 6 – f li l d Portfolio Analyses and the Markowitz Portfolio Selection Model Darwin Choi September 26, 2011 Recap from Last Lecture Utility Indifference Risk & Return for Security Portfolios Mean Variance Criterion Allocation Decision Levels Asset Allocation & Security Selection Complete Portfolio Return & Risk A Risky Asset & A Riskfree Asset The Capital Allocation Line All Possible Complete Portfolios 2
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Outline of Today’s Lecture Outline of Today s Lecture Risk Tolerance & Portfolio Choice Portfolios of Two Risky Assets l f l Minimum Variance & Optimal Portfolio Optimal Complete Portfolio 3 Risk Tolerance & Asset Allocation Given that: E( r C ) = r f + y [E( r P ) – r f ] ) r C = y P U C = E[ r C ] – ½A C 2 U C = r f + y [E( r P ) – r f ] – ½A y 2 P 2 What is the Optimal Asset Allocation, y* = ? 4
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