FNCE20001 Lecture Notes - Lecture 7: Expected Return, Systematic Risk, Modern Portfolio Theory
Document Summary
Refers to the strategy where an investor borrows funds at the risk-free rate of return and invests all the available funds in a risky security (or portfolio). Expected return is always going to be the same in any state/scenario. No correlation or covariance between a risk-free security any other securities. Notes: weights are relative to investor"s original wealth, hence don"t include borrowings as those must be paid back. Leveraging extends the available options for investors trying to maximise their utility. Invest more than you have buy borrowing. Refers to borrowing shares, selling them now with a contractual promise to buy them back later at (an expected) lower price. Definition: sale of a security that has been borrowed, and is motivated by the belief that the security"s price will decline in the future, enabling it to be bought back at a lower price to make a profit. Profit from a decrease in the price of the stock.
