Exam 2 - Chapter 6 [SLIDES] Flashcards
Chapter 5 last page
- possible complete portfolio
Combination of risk free and risky portfolio
Chapter 5 last page
Possible complete portfolio
Straight line is the capital allocation line (CAL)
Chapter 5
- last page
Possible complete portfolio
Where you want to be on the CAL line is depending on the risk levels you want to take
Chapter 5
- possible complete portfolio
What reward you want depending on the risk
Use the slope
Portfolio return
The weighted average of individual asset returns
The expected return is usually _____ than the standard deviation
Lower
When its perfectly positive correlated there is no _______
Diversification
In the real world correlated there is no such thing as (2)
- -1 correlated
2. +1 correlated
Amount of rick reduction depends critically on ________
Correlation or covariant
Adding securities with correlations _____ in the portfolio will result in risk reduction
< 1
If risk is reduced by more than the weighted average of individual asset risks in the portfolio, what happens to the expected return per unit of risk? Or Sharpe ratio
?
Why do we want to see the Capital Allocation Line ?
To see the risk and return
No matter how diversified your portfolio is, you wont be able to reduce the risk to ____
Zero
The set of portfolio that provide the optimal trade-offs are described as the ______ ______
Efficient frontier
The efficient frontier are _____ or the _____ diversified possible combinations
Dominant and diverse infield
All investors should want a portfolio on the ______ ________
Efficient frontier
The opportunity set is obtained by ?
Combination of a risky portfolio and risk-free asset is linear in the return-risk space
Equilibrium has the assumption of
We have all the same information
Investment opportunity set will be the _____ if it’s in Equilibrium
Same
(3) Equilibrium
- Homogeneous beliefs: every investor share the same information
- No transaction costs
- No taxes
Then in equilibrium,
Every investor faces the same ______ ______
Every investor would hold the ______ _______ ________
Efficient frontier
same risky portfolio
The CAL is called the
Capital Market Line (CML)
Then the P is then called the
Market portfolio, M
Non diversified what is the expected rate of return for an individual asset
We dont know
