FNCE20001 Lecture Notes - Lecture 8: Standard Deviation, Risk Premium, Modern Portfolio Theory
Document Summary
The efficient frontier (ff") is an envelope of risk-return frontiers made up of individual portfolios of risky asset. Ff" plots risky portfolios which have the lowest risk (standard deviation) for a given expected return. Ff" line is the minimum risk for a level of expected return. Variance is limited because of systematic risks can"t diversify them away. Ff" is a boundary no portfolio can bring you past this. Without a risk-free security investors will choose different portfolios of risky securities. Choose portfolio that touches the indifference curve and the ff" line. Investing in the risk-free security positive weight. Borrowing at the risk-free rate negative weight. Invest more than you have in the risky portfolio. Can control risk and return by mixing up a risky portfolio with a risk-free security. Can combine any portfolio with a risk-free security, which allows you to:
