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Diversification of Risks:

Minimum Variance Portfolio. The maximum return any one will be willing to receive for a certain level of risk.Adding the risk free modifies the efficient set to be linear now. Capital market lineRisk added by new asset is proportional to sim. Covariance is standardized by dividing it with sm

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Diversification of Risks:

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    1. Diversification of Risks: Total Risk = Firm Specific Risk + Market Wide Risk Unique Risk = 1. Management Risk a) acts of god b) Product Obsolescence c) Errors 2. Default Risk a) Financial Leverage b) Operating Leverage 3. Industry Risk 4. Liquidity Risk Market Risks = 1. Interest Rate Risk a) Inflation Risk b) Real Rate Risk 2. Market Risk c) Business cycles d) Economic Policy Dec. Tax Code Change

    2. Minimum Variance Portfolio The maximum return any one will be willing to receive for a certain level of risk. Adding the risk free modifies the efficient set to be linear now. Capital market line Risk added by new asset is proportional to sim. Covariance is standardized by dividing it with sm². Beta = sim/ sm² and E(Ri)-Rf = ß[E(Rm)-Rf]

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