Portfolio Choice

Question 1

Diversification principle setup

Answer 1

n i.i.d.

Question 2

Prove diversification

Answer 2

rewrite any portfolio as equal weight plus noise

Question 3

Prove principle of diversification

Answer 3

theta set at 0

Question 4

budget constraint

Answer 4

W_0(1+r)+theta\tilde x

Question 5

CARA normal optimal weights

Answer 5

mu/A\sigma^2 where mu is excess

Question 6

Wealth return approximation

Answer 6

r_p-r_f=\alpha(r-r_f)+1/2\alpha(1-\alpha)\sigma^2

Question 7

Solve CRRA problem

Answer 7

alpha=arithmetic excess / (gamma * sigma^2)

Question 8

Mean Variance problem (solve for lambda(bar r) and SR)

Answer 8

argmin variance given r_f+\theta\mu=\bar r