Lecture 10 (Chapter 10)

Question 1

What is CAPM?

Answer 1

Capital asset pricing model. A theory which enable us to price and determine expected returns of investments / assets.

Beräknar det avkastningskrav en investerare kräver för att investera i en tillgång med given risk.

Question 2

Portfolio of assets?

Answer 2

A collection of assets in different proportions

Question 3

Assumtions to simplify the analysis of portfolio optimization problem?

Answer 3

1. Utility is a function of SEK/dollar/money
2. Utility is an increasing function of SEK/dollar/money
3. The returns of risky assets are normally distributed

Question 4

Portfolio theory - risk preferences?

Answer 4

Risk averse: will experience a decrease in utility IF the stdv of the income increases (ogillar hög risk)

Risk neutral: will be indifferent if the stdv of the income increases

Risk seeking: utility will increase if the stdv of income increases (risk loving)

Question 5

How does risk averse’s indifference curves look? Risk neutral? Risk loving?

Answer 5

The more risk averse, the steeper curves (brantare)

The less risk averse, the less steep

Risk neutral går rakt ut horisontellt

Risk loving has downward sloping indifference curves

Question 6

Diversification?

Answer 6

Implies that certain risks, but not all, disappear from the portfolio

Question 7

How can diversification affect a risk averse?

Answer 7

Diversification can lead to higher utility for a risk averse. Instead of investing in only A or B you invest in them both since changes in A and B offset each other, resulting in higher utility.

Question 8

MVP?

Answer 8

Minimum variance portfolio. Dvs portfolion med minsta variansen bland alla möjliga portfolier.

Question 9

EF?

Answer 9

Efficient frontier. De möjliga portfolierna som maximerar my för varje givet sigma. HÖGSTA INDIFFERENSKURVORNA