Reading #43 - Port. Risk and Return P1 Flashcards
Portfolio holding period return formula
Price + div / Price
define risk-averse investor
simp only one that dislikes risk
define minimum variance portfolios
“portfolios that have lowest stand dev of all portfolios with a given expected return”
define minimum variance frontier
a group of minimum-variance portfolios. “set of all attainable risky assets with the highest expected return for a given level of risk or the lowest amount of risk for a given level of return.”
define the efficient frontier
“portfolios that have the greatest expected return for each level of risk (stnd deviation)” “there are no more diversification benefits”
define global min- var portfolio
“portfolio on efficient frontier that has least risk”
define utility function
“represents the investor’s preference in terms of risk and return”
define indifference curve
“tool from econ that plots combinations of risk and return among which an investor is indifferent”
do indifference curves slope up or downwards for risk-averse investors?
upwards because they will take on more risk for higher expected returns
what is the capital allocation line
“line that represents the possible combinations of risk-free and optimal risky asset portfolios”
abnormal return formula
Abnormal return = Actual return - expected risk-adjusted return
reducing correlation between two assets moves the efficient frontier how?
“expanding to the left and possibly slightly upward. This reflects the influence of correlation on reducing portfolio risk.”
what type of relationship (linear, curve, etc) do possible portfolios of risky and RF assets have between exp. return and stnd deviation
“The possible portfolios of a risky asset and a risk-free asset have a linear relationship between expected return and standard deviation.”
