FIN401-Chapter 6 (exam 2)

50 stock 50 stock correlation coefficient 1 example

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Unformatted text preview: n coefficient = -.1 Example Problem Example Expected return: .5(6) + .5(10) = 8% .5(6) Standard deviation: Standard = 13.3% 13.3% Efficient Portfolios Efficient Smallest portfolio risk for a given level of Smallest expected return expected Largest expected return for a given level of portfolio risk of Optimal portfolios Plotted on the efficient frontier Plotted Dominate all other portfolios Dominate all Components of Risk Components Market or systematic risk: risk related to the macroeconomic factor or market index Unsystematic or firm-specific risk: unique to the company the Total risk = Systematic risk + Unsystematic risk σ2 measures total risk measures » Includes the variance attributable to market uncertainty Includes and the variance attributable to firm-specific risk factors variance Measuring Components of Risk Measuring σi2 = βi2 σm2 + σ2(ei) where: σi2 = total variance total βi2 σm2 = systematic variance systematic σ2(ei) = unsystematic variance unsystematic...
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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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