Risk, Diversification & the Market Portfolio

Risk, Diversification & the Market Portfolio -...

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Unformatted text preview: 8-1Risk, Diversification & the Market Portfolio•The Market Portfolio–Because portfolio M lies at the point of tangency, it has the highest portfolio possibility line–Everybody will want to invest in Portfolio M and borrow or lend to be somewhere on the CML–It must include ALL RISKY ASSETS–Since the market is in equilibrium, all assets in this portfolio are in proportion to their market values–Because it contains all risky assets, it is a 8-2Risk, Diversification & the Market Portfolio•Systematic Risk –Only systematic risk remains in the market portfolio–Systematic risk is the variability in all risky assets caused by macroeconomic variables•Variability in growth of money supply•Interest rate volatility•Variability in factors like (1) industrial production (2) corporate earnings (3) cash flow–Systematic risk can be measured by the standard deviation of returns of the market 8-3Risk, Diversification & the Market Portfolio•How to Measure Diversification–All portfolios on the CML are perfectly...
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This note was uploaded on 01/24/2012 for the course FIN 4360 taught by Professor Davidbray during the Spring '12 term at Kennesaw.

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Risk, Diversification & the Market Portfolio -...

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