FM11 Ch 05 Show - CHAPTER 5 5-1 Risk and Return Portfolio Theory and Asset Pricing Models Portfolio Theory Capital Asset Pricing Model(CAPM Efficient

FM11 Ch 05 Show - CHAPTER 5 5-1 Risk and Return Portfolio...

This preview shows page 1 - 13 out of 44 pages.

5 - 1 CHAPTER 5 Risk and Return: Portfolio Theory and Asset Pricing Models Portfolio Theory Capital Asset Pricing Model (CAPM) Efficient frontier Capital Market Line (CML) Security Market Line (SML) Beta calculation Arbitrage pricing theory Fama-French 3-factor model
Image of page 1
5 - 2 Portfolio Theory Suppose Asset A has an expected return of 10 percent and a standard deviation of 20 percent. Asset B has an expected return of 16 percent and a standard deviation of 40 percent. If the correlation between A and B is 0.6, what are the expected return and standard deviation for a portfolio comprised of 30 percent Asset A and 70 percent Asset B?
Image of page 2
5 - 3 Portfolio Expected Return %. 2 . 14 142 . 0 ) 16 . 0 ( 7 . 0 ) 1 . 0 ( 3 . 0 r ˆ ) w 1 ( r ˆ w r ˆ B A A A P = = + = - + =
Image of page 3
5 - 4 Portfolio Standard Deviation 309 . 0 ) 4 . 0 )( 2 . 0 )( 4 . 0 )( 7 . 0 )( 3 . 0 ( 2 ) 4 . 0 ( 7 . 0 ) 2 . 0 ( 3 . 0 ) W 1 ( W 2 ) W 1 ( W 2 2 2 2 B A AB A A 2 B 2 A 2 A 2 A p = + + = - + - + = σ σ ρ σ σ σ
Image of page 4
5 - 5 Attainable Portfolios: ρ AB = 0.4 ρ AB = +0.4: Attainable Set of Risk/Return Combinations 0% 5% 10% 15% 20% 0% 10% 20% 30% 40% Risk, σ p Expected return
Image of page 5
5 - 6 Attainable Portfolios: ρ AB = +1 ρ AB = +1.0: Attainable Set of Risk/Return Combinations 0% 5% 10% 15% 20% 0% 10% 20% 30% 40% Risk, σ p Expected return
Image of page 6
5 - 7 Attainable Portfolios: ρ AB = -1 ρ AB = -1.0: Attainable Set of Risk/Return Combinations 0% 5% 10% 15% 20% 0% 10% 20% 30% 40% Risk, σ p Expected return
Image of page 7
5 - 8 Attainable Portfolios with Risk-Free Asset (Expected risk-free return = 5%) Attainable Set of Risk/Return Combinations with Risk-Free Asset 0% 5% 10% 15% 0% 5% 10% 15% 20% Risk, σ p Expected return
Image of page 8
5 - 9 Expected Portfolio Return, r p Risk, σ p Efficient Set Feasible Set Feasible and Efficient Portfolios
Image of page 9
5 - 10 The feasible set of portfolios represents all portfolios that can be constructed from a given set of stocks. An efficient portfolio is one that offers: the most return for a given amount of risk, or the least risk for a give amount of return. The collection of efficient portfolios is called the efficient set or efficient frontier .
Image of page 10
5 - 11 I B 2 I B 1 I A 2 I A 1 Optimal Portfolio Investor A Optimal Portfolio Investor B Risk σ p Expected Return, r p Optimal Portfolios
Image of page 11
5 - 12 Indifference curves reflect an investor’s attitude toward risk as reflected in his or her risk/return tradeoff function. They differ among investors because of differences in risk aversion.
Image of page 12
Image of page 13

You've reached the end of your free preview.

Want to read all 44 pages?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes