Reading 44: Basics of Portfolio Planning and Construction

Question 1

Utility Equation for Investor’s Expected utility from the portfolio

44.1

Basics of Portfolio Planning and Construction

Answer 1

Where:

Up = investor’s expected utility from the portfolio

E(Rp) = expected return of the portfolio

σ_p = the standard deviation of returns of the portfolio

lamda = a measure of the investor’s risk aversion

Question 2

A Multi-Asset Class Portfolio’s Expected Return

44.2

Basics of Portfolio Planning and Construction

Answer 2

Where:

w_i equals the weight of the asset class i in the portfolio

Question 3

Risk of A Multi-Asset Class Portfolio

44.3

Basics of Portfolio Planning and Construction

Answer 3

Question 4

Covariance between the returns on asset classes i and j

44.4

Basics of Portfolio Planning and Construction

Answer 4

Where:

Cov(Ri,Rj) = the covariance between the return of asset classes i and j

Pi,j - the correlation between the returns of asset classes i and j