7 risk and reward two assets case x1 1 1 2 2 12 p p

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Unformatted text preview: R1 + x2 R2 ) = x1 µ1 + x2 µ2 2 2 2 Var(RP ) = σP = Var(x1 R1 + x2 R2 ) = x2 σ1 + x2 σ2 + 2x1 x2 · ρσ1 σ2 1 2 K.S. Tan/Actsc 372 F11 Modern Portfolio Theory & CAPM – p. 7 Risk and Reward: Two Assets Case x1 µ1 σ1 µ2 σ2 ρ12 µP (%) σP (%) 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 8% 12% 14% 20% 0.3 x2 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 8.00 8.60 9.20 9.8 10.40 11.00 11.60 12.20 12.80 13.40 14.00 12.00 11.56 11.45 11.70 12.26 13.11 14.20 15.47 16.88 18.40 20.00 K.S. Tan/Actsc 372 F11 Modern Portfolio Theory & CAPM – p. 8 Risk and Reward: The impact of correlation x1 x2 µP 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 8.00 8.60 9.20 9.80 10.40 11.00 11.60 12.20 12.80 13.40 14.00 K.S. Tan/Actsc 372 F11 Portfolio std. dev. (%) for a given ρ ρ = −1 ρ = −0.3 ρ = 0 ρ = 0.3 ρ = 1 12.00 8.80 5.60 2.40 0.80 4.00 7.20 10.40 13.60 16.80 20.00 12.00 10.38 9.23 8.74 9.02 10.00 11.51 13.37 15.45 17.68 20.00 12.00 10.98 10.40 10.32 10.76 11...
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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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