43 systematic vs nonsystematic risks the total risk

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Unformatted text preview: uch that any efficient portfolio can be constructed as a combination of the fund P and the risk-free asset. The Separation Theorem: a.k.a. “lighten the work of a mutual fund manager"! K.S. Tan/Actsc 372 F11 Modern Portfolio Theory & CAPM – p. 40 The Separation Theorem Portfolio choice decision can be separated into two stages: I: Determining optimal risky portfolio (only risky assets) this portfolio is identical for all investors that share the same input estimates (expected returns and variances, and covariances;) · i.e. homogeneous expectations independent of investors’ risk aversion One fund theorem II: Choice of optimal mix of the risky portfolio and the risk-free asset (optimal overall portfolio) investor’s overall portfolio is a linear combination of the optimal risky portfolio and the risk-free asset this depends on investor’s risk aversion here investor is the decision maker K.S. Tan/Actsc 372 F11 Modern Portfolio Theory & CAPM – p. 41 An Illustration of The Separation Theorem Assume the economy consists of 2 risky assets (RIM & SLF) and a risk-free asset Suppose the c...
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This note was uploaded on 01/04/2012 for the course ACTSC 372 taught by Professor Maryhardy during the Fall '09 term at Waterloo.

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