Portfolios ii r j hawkins econ 136 financial

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Unformatted text preview: σi σj ρi ,j i =1 j =1 where ρi ,j is the correlation between returns ri and rj , and σi σj ρi ,j is the covariance between returns ri and rj . Portfolios II: R. J. Hawkins Econ 136: Financial Economics 4/ 30 The Capital Asset Pricing Model Portfolios with Risk-Free Asset The expected return of the portfolio with a risk-free asset and asset H is E (rport ) = (1 − wH )rf + wH E (rH ) = rf + wH (E (rH ) − rf ) Equity risk premium! The risk of the portfolio with a risk free asset and asset H is 2 2 2 22 2 σport = (1 − wH )σrf + wH σH + 2(1 − wH )wH ρrf ,rH σrf σH 0 0 2 2 22 2 2 U U = (1 − wH )σr + wH σH + 2(1 − wH )wH ρrf ,rH σrσH f f 22 = wH σH   so σport = wH σH Portfolios II: R. J. Hawkins Econ 136: Financial Economics 14/ 30 The Capital Asset Pricing Model Markowitz’s insight concerning the importance of correlation Times Mirror & Unilever Portfolio wσport =0 0.5 ULA 0.18 0.40 0.25 = 0.25 + 0.65 = 0.385 RISK and EXPECTED RETURN E(r) σ TM 0.14 0.25 Ris...
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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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