2- Mean-variance analysis and efficient portfolios Flashcards
1
Q
What is the quadratic utility function?
A
U(x) = x - bx²
2
Q
When is a utility u(x) Hyperbolic Absolute Risk Aversion (HARA)?
A
When its absolute risk aversion is a hyperbolic function:
γ(x) = -U’‘(x)/U’(x) = 1/ax+b
3
Q
What is the mean-variance criterion?
A
For a given variance the optimal choice has largest mean, and for a given mean the optimal choice has lowest variance
4
Q
What is the mean return of a portfolio (u’)?
A
Weighted mean of each asset
uₚ = u’ω = Σⱼuⱼωⱼ
5
Q
What is the expression for portfolio share (ωᵢ)?
A
ωᵢ = xᵢpᵢ/W
