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Portfolio Theory (Risk (Risk
Measurement (Std deviation
- measure…
Portfolio Theory
Risk
Definition
- Chance of suffering loss
- Uncertainty of future outcomes (variability or returns on asset)
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Return
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Return
Measurement
expected value of return
Portfolio
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Theory
Assumptions:
- I consider each investment alternatives - represented by probability distribution of expected returns
- I estimate portfolio risk - based on variability of
expected return
- I decisions solely based on risk and return
- given risk - I prefer higher return than lower
given return - I prefer lower risk than higher
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Correlation
Coefficent
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movement known as 'correlation'
- perfectly positively correlated
- perfectly negatively correlated
even if not perfectly correlated - can still realize diversification benefits by combining into portfolio
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Risk- retun R/S
- positive
- higher returns associated with higher risks
- market participants need higher return as compensation in for higher risk
Adding Asset
to Portfolio
Unsys risk - eliminated by holding more securities
Sys risk - cannot eliminiate, but can minimized - diversification bcz macro factors: inflation, int rate
Efficient
Portfolio
- Feasible or attainable set (shaded area)
risk-return combinations attainable to all possible portfolios
- Efficient frontier set (pt. BYOZC)
Portfolio - highest return for a given risk level
- Point O
Highest satisfaction level investor can achieve