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Week 6: Portfolio Theory (Asset allocation between risky and risk- free…
Week 6: Portfolio Theory
Capital Asset Pricing Model (CAPM)
Ri = Rf + (Rm - Rf)*Bi
Bi = cov(Ri,Rm)/ var(Rm)
WACC
Asset allocation between risky and risk- free assets
Complete portfolio
E(Rc) = wE(Rp) + (1-w)E(Rf)
Combination without leverage
Combination with leverage
Risk aversion and asset allocation
greater risk aversion => larger proportions of risk- free rate
assumptions on investors and expected utility (p.17)
Passive strategies and the CAPM
passive strategy: investing in a broad stock index and a risk- free investment
Active vs Passive Strategies (p.20)
Asset allocation with two or more risky assets
Combinations of risky assets
Covariance and correlation
Portfolio variance and standard deviation
Efficient diversification with risk- free and many risky assets
The Efficient Frontier
Minimum variance combinations