07.a - 7/16/2011 Chapter7 OptimalRiskyPortfolios Chapter7

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7/16/2011 1 Chapter 7 Optimal Risky Portfolios Covariance Chapter 7 Optimal Risky Portfolios -PartI Portfolios of Two Risky Assets / Markowitz Calculations -PartII Diversification / Efficient Frontier - Part III
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7/16/2011 2 Consider 2 risky assets, Stock A and Stock B: Covariance Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Average Stock A 0.010 0.050 0.020 0.070 0.030 0.060 0.040 Stock B 0.060 0.030 0.070 0.020 0.050 0.010 0.040 ½ A & ½ B 0.035 0.040 0.045 0.045 0.040 0.035 0.040 0 0.02 0.04 0.06 0.08 0 0.02 0.04 0.06 0.08 0 1 2 3 4 5 6 7 01234567 0 0.02 0.04 0.06 0.08 0 0.02 0.04 0.06 0.08 Consider 2 risky assets, Stock A and Stock B: Covariance Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Average Stock A 0.010 0.050 0.020 0.070 0.030 0.060 0.040 Stock B 0.060 0.030 0.070 0.020 0.050 0.010 0.040 ½ A & ½ B 0.035 0.040 0.045 0.045 0.040 0.035 0.040 0.06 0.08 A Er B r Notice the following:     B BA A rE r r  0 0.02 0.04 0 0.02 0.04 0.06 0.08 B A r     B A r r 
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7/16/2011 3 Consider 2 more risky assets, Stock C and Stock D: Covariance Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Average Stock C 0.010 0.050 0.020 0.070 0.030 0.060 0.040 Stock D 0.030 0.060 0.020 0.070 0.010 0.050 0.040 ½ C & ½ D 0.020 0.055 0.020 0.070 0.020 0.055 0.040 0 0.02 0.04 0.06 0.08 0 1 2 3 4 5 6 7 0 0.02 0.04 0.06 0.08 0 1 2 3 4 5 6 7 0 0.02 0.04 0.06 0.08
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07.a - 7/16/2011 Chapter7 OptimalRiskyPortfolios Chapter7

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