9 Risk and Return Flashcards
1
Q
Random/Passive portfolios
A
Broad market returns with market risk only
2
Q
Efficient/Active portfolios
A
Expected returns-based with minimized risk
Risk-based with maximized returns
Weightings driven
3
Q
Markowitz MPT
A
(All risky assets including real assets)
(Can be applied to stocks only)
- Plot points represent portfolios of N assets
- Risk measured by variance or std
- All portfolios on Eff Frontier are “mean/variance’ efficient
4
Q
Markowitz CAL
A
Capital Allocation Line
- Originates at rfr, is tangent to EF at Optimal Risky Portfolio
5
Q
Markowitz CML
A
Capital Market Line
- Originates at rfr, is tangent to EF at Market Portfolio
6
Q
CAL & CML
A
Each enables return and risk combinations:
- Less than the minimum-variance risky portfolio
- Above the market/optimal portfolios with leverage
7
Q
E(R)
A
w[rf]rf + (1-w[rf])r[risky]
8
Q
Risk
A
w[rf] * σ[rf] + (1 – w[rf]) * σ[risky]
