7 portfolio betas and associated changes in returns

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Unformatted text preview: tive risk­return relationship Key Aspects of MPT: Portfolio Betas Betas Table 5.6 Austin Fund’s Portfolios V and W Interpreting Portfolio Betas Interpreting Portfolio betas are interpreted exactly the same way as individual stock betas. – Portfolio beta of 1.00 will experience a 10% increase when the market increase is 10% – Portfolio beta of 0.75 will experience a 7.5% increase when the market increase is 10% – Portfolio beta of 1.25 will experience a 12.5% increase when the market increase is 10% Low­beta portfolios are less responsive and less risky than high­beta portfolios. A portfolio containing low­beta assets will have a low beta, and vice versa. Interpreting Portfolio Betas Interpreting Table 5.7 Portfolio Betas and Associated Changes in Returns Reconciling the Traditional Approach and MPT Approach Recommended portfolio management policy uses aspects of both approaches: – Determine how much risk you are willing to bear – Seek diversification between different types of securities and industry lines – Pay attention to correlation of return between securities – Use beta to keep portfolio at acceptable level of risk – Evaluate alternative portfolios to select highest return for the given level of acceptable risk The optimal complete portfolio The 1. You invest $100 in a risky asset with an expected rate of return of 0.12 and a standard deviation of 0.15 and a T-bill with a rate of return of 0.05 of a) What percentages of you...
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This note was uploaded on 10/31/2012 for the course ECON 435 taught by Professor Staff during the Fall '08 term at Maryland.

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