J hawkins econ 136 financial economics 21 30 10 the

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Unformatted text preview: k generally isn’t linear in portfolio weight 0.4 return risk, ρ = +1 risk, ρ = 0 risk, ρ = -1 0.3 0.2 0.1 0.0 0.0 0.2 0.4 0.6 0.8 Fraction of Portfolio in Unilever Portfolios II: R. J. Hawkins Econ 136: Financial Economics 21/ 30 1.0 The Capital Asset Pricing Model Markowitz, correlation and diversification EXPECTED RETURN (%) 12 Markowitz’s Insights Risk across assets is correlated due to broad economic influences. M-H Port: = 1.0 M-H Port: = 0.5 M-H Port: = 0.0 M-H Port: = -0.5 M-H Port: = -1.0 Some risk can be eliminated by holding a diversified portfolio. 11 Zero correlation is not needed! 10 0 10 20 30 40 RISK ( ) Diversification-correlation tradeoff. Coined term “Efficient Frontier”. Portfolios II: R. J. Hawkins Econ 136: Financial Economics 24/ 30 CAPM and β Intuition 15 Expected Return EXPECTED RETURN (%) CAPITAL-MARKET LINE E (ri ) = rf + β [E (rm ) − rf ] 10 ASSET H 2 β = σi ,m /σm ASSET M 5 0 0 10 σi ,m ≡ covariance with market rf-M Port rf-H Port M-H Port: = 1.0 M-H Port: = 0.0 rf-Optimum Port: = 0.0 RISK-FREE (rf) 20 30 40 50 2 σm ≡ market variance RISK ( ) Add a small amount wi o...
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This note was uploaded on 01/23/2014 for the course ECON 136 taught by Professor Szeidl during the Fall '08 term at University of California, Berkeley.

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