FIN401-Chapter 6 (exam 2)

number of securities in portfolio 100 markowitz

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Unformatted text preview: lio 100+ Markowitz Diversification Markowitz Non-random diversification Active measurement and management of portfolio risk risk Investigate relationships Investigate relationships Takes advantage of expected return and risk for Takes expected risk individual securities and how security returns move together together Measuring Portfolio Risk Measuring Needed to calculate the risk of a Needed portfolio: portfolio: » Weighted individual security risks Weighted → Weighted variance using the proportion of funds in each security funds → For security i: (wj x stddevj)^2 (wj Measuring Portfolio Risk Measuring Needed to calculate the risk of a portfolio: » Weighted co-movements between returns → Return covariances are weighted using the Return proportion of funds in each security proportion → For securities i, j: 2(wi)(wj) x stdev(ij) 2(wi)(wj) Covariance Covariance Absolute measure of association » σij = ρij σi σj • where: ρij = correlation coefficient of returns σi = standard deviation of returns for security i σj = standard deviation o...
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This note was uploaded on 12/10/2011 for the course FIN 401 taught by Professor Staff during the Spring '08 term at Miami University.

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