Risk, Diversification & the Market Portfolio

Risk, Diversification & the Market Portfolio -...

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Unformatted text preview: 8-1Risk, Diversification & the Market PortfolioThe Market PortfolioBecause portfolio M lies at the point of tangency, it has the highest portfolio possibility lineEverybody will want to invest in Portfolio M and borrow or lend to be somewhere on the CMLIt must include ALL RISKY ASSETSSince the market is in equilibrium, all assets in this portfolio are in proportion to their market valuesBecause it contains all risky assets, it is a 8-2Risk, Diversification & the Market PortfolioSystematic Risk Only systematic risk remains in the market portfolioSystematic risk is the variability in all risky assets caused by macroeconomic variablesVariability in growth of money supplyInterest rate volatilityVariability in factors like (1) industrial production (2) corporate earnings (3) cash flowSystematic risk can be measured by the standard deviation of returns of the market 8-3Risk, Diversification & the Market PortfolioHow to Measure DiversificationAll portfolios on the CML are perfectly...
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Risk, Diversification & the Market Portfolio -...

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