In equilibrium one fund market portfolio market

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Unformatted text preview: tical instability, such risk cannot be eliminated or reduced through diversification and must be accepted by the investor. nonsystematic, diversifiable, unique risk: examples: business risk and financial risk. Thus, the aim is to invest into various assets so that your assets are not all affected the same way by market events. Diversified Portfolio ⇔ Systematic Risk see Figure 11.7 K.S. Tan/Actsc 372 F11 Modern Portfolio Theory & CAPM – p. 44 Capital Asset Pricing Model (CAPM) due to William Sharpe (1964), John Lintner (1965) and Jan Mossin (1966) builds on Markowitz portfolio theory it predicts an equilibrium relationship between risk and expected return on risky assets, assuming that individuals are basically alike, except for wealth and risk aversion provides the “correct" measure of risk for any asset only compensates investors for bearing systematic risk addresses the ONE FUND that all investors will hold! K.S. Tan/Actsc 372 F11 Modern Portfolio Theory & CAPM – p. 45 CAPM - Assumptions Assumptions (in addition to Markowitz’s): There are many investor...
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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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