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UGBA103-F04-class12portfoliosandCAPM(6slides)

UGBA103-F04-class12portfoliosandCAPM(6slides) - Todays...

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1 class #12 page 1 Portfolios and CAPM class #12 class #12 page 2 Today’s culture quiz Who is this person ? Harry Markowitz 1990 Nobel Prize in economics The man responsible for portfolio theory !!! class #12 page 3 In his own words … The basic concepts of portfolio theory came to me one afternoon in the library while reading John Burr Williams's Theory of Investment Value. Williams proposed that the value of a stock should equal the present value of its future dividends. Since future dividends are uncertain, I interpreted Williams's proposal to be to value a stock by its expected future dividends. But if the investor were only interested in expected values of securities, he or she would only be interested in the expected value of the portfolio; and to maximize the expected value of a portfolio one need invest only in a single security. This, I knew, was not the way investors did or should act. Investors diversify because they are concerned with risk as well as return. Variance came to mind as a measure of risk. The fact that portfolio variance depended on security covariances added to the plausibility of the approach. Since there were two criteria, risk and return, it was natural to assume that investors selected from the set of Pareto optimal risk-return combinations. class #12 page 4 Today’s plan Quick review from last class Introduce the capital asset pricing model (CAPM) class #12 page 5 Review from last class What was the key concept from last class ? ( hint: it was stated in two different ways ) class #12 page 6 Review from last class Which of the following portfolios have the least risk?
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