lecture23

lecture23 -...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Open Yale Courses ECON 251: Financial Theory Lecture 23 - The Mutual Fund Theorem and Covariance Pricing Theorems << previous session | next session >> Overview: This lecture continues the analysis of the Capital Asset Pricing Model, building up to two key results. One, the Mutual Fund Theorem proved by Tobin, describes the optimal portfolios for agents in the economy. It turns out that every investor should try to maximize the Sharpe ratio of his portfolio, and this is achieved by a combination of money in the bank and money invested in the "market" basket of all existing assets. The market basket can be thought of as one giant index fund or mutual fund. This theorem precisely defines optimal diversification. It led to the extraordinary growth of mutual funds like Vanguard. The second key result of CAPM is called the covariance pricing theorem because it shows that the price of an asset should be
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/08/2012 for the course ECON 251 taught by Professor Geanakoplos,john during the Fall '09 term at Yale.

Ask a homework question - tutors are online