markowitz

# E rasset rf risk premium ks tanactsc 372 f11 modern

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Unformatted text preview: excess of the riskfree return; i.e. rasset = rf + risk premium K.S. Tan/Actsc 372 F11 Modern Portfolio Theory & CAPM – p. 3 Return Statistics RA : rate of return r.v. (over one holding period) for asset A pi = Pr(RA = xi ), Expected return: E(RA ) = µA = Variance: Var(RA ) = ￿ i p i xi , ￿ 2] = E[(RA − µA ) i p i ( xi − µA )2 2 = E[(RA )2 ] − (E[RA ])2 = σA ￿ Standard Deviation: s.d.(RA ) = Var(RA ) = σA , Covariance: Cov(RA , RB ) = E[(RA − µA )(RB − µB )] E(RA RB ) − E(RA )E(Rb ) Correlation: ρAB = ρ = Cov(RA , RB ) σA σB K.S. Tan/Actsc 372 F11 Modern Portfolio Theory & CAPM – p. 4 Estimating Return Statistics Probability Stock A (RA ) Stock B (RB ) Recession 0.3 -2.0% 5.0% Normal 0.6 9.2% 6.2% Boom 0.1 15.4% 7.4% State E(RA ) = 0.3(−0.02) + 0.6(0.092) + 0.1(0.154) = 6.46% = µA Var(RA ) = 0.3(−0.02 − µA )2 + 0.6(0.092 − µA )2 + 0.1(0.154 − µA )2 = 0.003397 = E[(RA )2 ] − [E(RA )]2 = 0.00757 − 0.06462 ￿ √ σA = Var(RA ) = 0.00339...
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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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