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II. The Two Security Case and The Case of Multiple Assets

Learn how to develop equations for portfolio analysis and derive portfolio characteristics for multiple assets. Understand the importance of expected return, standard deviation, and correlation in portfolio management.

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II. The Two Security Case and The Case of Multiple Assets

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  1. II. The Two Security Case and The Case of Multiple Assets

  2. Return Can calculate from past data For future can only estimate with uncertainty How Proceed Simple Example Develop Equations of Portfolio Analysis

  3. Return R1 Probability 0.00 .10 0.12 .80 0.24 .10 How Summarize

  4. 0.00 .10 .12 .80 .24 .10

  5. R P .0 .01 E(R) = .12 .06 .16 = .00144 .12 .66 .18 .16 .24 .01

  6. DERIVATION OF PORTFOLIO CHARACTERIESTICS 2 SECURTITIES Rp = XARA + XBRB • E(Rp) = XA E (RA) + XB E (RB) 2. 3.

  7. THREE QUALITIES THAT ARE IMPORTANT • EXPECTED RETURN • STANDARD DEVIATION • CORRELATION

  8. More than two securities 1. 2.

  9. 1. OR 3. Basis of every product and insight in portfolio management since Markowitz.

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