lec02_02 - ECON 4721H Money and Banking Lecture 02_02...

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Unformatted text preview: ECON 4721H Money and Banking Lecture 02_02 Satoshi Tanaka University of Minnesota September 21, 2011 Satoshi Tanaka ECON 4721H Money and Banking Lecture 02_02 Stock Market II Mean-Variance Frontier and -CAPM Satoshi Tanaka ECON 4721H Money and Banking Lecture 02_02 Today's Questions What determines the price of each stock? Do idiosyncratic risks matter? How about aggregate (systematic) risks? Satoshi Tanaka ECON 4721H Money and Banking Lecture 02_02 Mean-Variance Frontier of All Assets Claim Rational investors always choose a portfolio which is on the mean-variance frontier of all assets, ( 1- ) R f + R m . mean standard deviation R f ER m ( R m ) R m Satoshi Tanaka ECON 4721H Money and Banking Lecture 02_02 Mean-Variance Frontier of All Assets Investors prefer higher mean and less volatility of returns. mean standard deviation R f investors indifference curves Satoshi Tanaka ECON 4721H Money and Banking Lecture 02_02 Summary of MV Frontier 1 By combining various stocks, we can minimize idosyncratic risks, and can nd the mean-variance frontier of all risky assets . 2 If we draw a tangent line to the MV frontier from the risk-free asset, we can nd the mean-variance frontier of all assets ( capital market line )....
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This note was uploaded on 02/07/2012 for the course ECON 4721H taught by Professor Tanaka during the Fall '11 term at Minnesota.

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lec02_02 - ECON 4721H Money and Banking Lecture 02_02...

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