1 / 5

Warm-up Problem

Explore concepts like correlation, risk, and diversification in investment portfolio management, including the impact on returns and the Capital Asset Pricing Model (CAPM).

derrickrivera
Download Presentation

Warm-up Problem

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Warm-up Problem • If X and Y are uncorrelated, then Var[X-Y] = Var[X] - Var[Y]. T/F?

  2. R = (1/N) ∑j Rj • Var[R]  0 if Rj uncorrelated • Var[R]  constant if Rj correlated • Diversification reduces risk / uncertainty • Not all risk can be diversified away • Idiosyncratic risk (diversifiable) • Market risk (undiversifiable)

  3. What’s better to receive in 1 year? (You currently own a large diversified portfolio P.) • $100 for sure • $180 w/ prob. 60%, 0 w/ prob. 40%independent of everything else • $180 if P goes up (w/ prob. 60%)$0, otherwise

  4. Capital Asset Pricing Model (CAPM) • Suppose everybody has the same opportunity to invest. • Suppose everyone can borrow & lend at the risk-free rate • Suppose everyone has the same information and horizon and measures • risk = standard deviation of portfolio return • reward = expectation of portfolio return

More Related