Lecture04

Lecture04 - goes down and in before it goes up, is: 1. A...

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Lecture 4: Portfolio Diversification and Supporting Financial Institutions Economics 252, Spring 2008 Prof. Robert Shiller, Yale University
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Optimal Portfolio Diversification in General Case • Drop assumption of equal weighting, independence and equal variance • Put x i dollars in i th asset, I =1,. ., n , where the x i sum to $1. • Portfolio expected value • Portfolio variance (two assets) =
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Efficient Portfolio Frontier with Two Assets • Frontier expresses portfolio standard deviation in terms of portfolio expected return r rather than in terms of x 1 .
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Portfolio Variance, Three Assets • Portfolio variance =
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Efficient Portfolio Frontier
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Beta • The CAPM implies that the expected return on the ith asset is determined from its beta. • Beta ( i ) is the regression slope coefficient when the return on the ith asset is regressed on the return on the market. • Fundamental equation of the CAPM:
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Survey of Individual Investors 1999 “Trying to time the market, to get out before it
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Unformatted text preview: goes down and in before it goes up, is: 1. A smart thing to do; I can reasonably expect to be a success at it. 11% 2. Not a smart thing to do; I cant reasonably expect to be a success at it. 83% 3. No opinion 5% Survey of Individual Investors 1999 Trying to pick individual stocks, for example, if and when Ford Motor stock will go up, or IBM stock will go up, is: 1. A smart thing to do; I can reasonably expect to be a success at it. 40% 2. Not a smart thing to do; I cant reasonably expect to be a success at it. 51% 3. No opinion 8% Survey of Individual Investors 1999 Trying to pick mutual funds, trying to figure out which funds have experts who can themselves pick which stock will go up, is: 1. A smart thing to do; I can reasonably expect to be a success at it. 50% 2. Not a smart thing to do; I cant reasonably expect to be a success at it. 27% 3. No opinion 23%...
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This note was uploaded on 02/08/2012 for the course ECON 252 taught by Professor Robertshiller during the Spring '08 term at Yale.

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Lecture04 - goes down and in before it goes up, is: 1. A...

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