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week 6 - Week 6 Tutorial Emily Lo Recap Week 5 Considered a...

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Week 6 Tutorial Emily Lo
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Recap Week 5 Considered a portfolio of risky assets Portfolios on the Efficient Frontier dominates all others as it has a higher return with the same level of risk Investors select Optimal risky portfolio by the level of risk aversion to maximise utility Implication? Investors with different degrees of risk aversion do not choose the same ORP
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Balanced/combined portfolio What are the two features of a risk-free asset? -Var(r f ) = 0 - E(r f ) = r f A balanced/combined portfolio ( in contrast to risky portfolio made up of risky assets) consists of a risk-free asset and any portfolio of risky asset (P) E(r c ) = (1-y)r f + yE(r p ) = r f + y[E(r p ) - r f ] Var(r c ) = (1-y) 2 Var(r f ) + y 2 Var(r p ) + 2(1-y)yCov(r f , r p ) = 0 + y 2 Var(r p ) + 0 σ c = y σ p
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Capital Allocation Line (CAL) Straight line that shows the risk return combinations of a set of balanced portfolios in different proportions E(r c ) = r f + y[E(r p ) r f ]
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