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lecture_1 notes.docx

Administrative Studies
Course Code
ADMS 3531

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Personal Investment Management
ADMS 3531 - Fall 2011 – Professor Dale Domian
Lecture 1, Part 2 – Diversification and Asset Allocation – Sept 13
Chapter Two Outline
Expected return and variances.
Diversification and portfolio risk.
Correlation and diversification.
Markowitz efficient frontier.
Asset allocation and security selection decisions of portfolio formation.
In fact, diversification has a profound effect on portfolio return and portfolio risk.
Diversification and Asset Allocation
Our goal in this chapter is to examine the role of diversification and asset allocation in
In the early 1950s, Professor Harry Markowitz was the first to examine the role and
impact of diversification.
Based on his work, we will see how diversification works, and we can be sure that we
have ‘efficiently diversified portfolios’.
oAn efficiently diversified portfolio is one that has the highest expected return,
given its risk.
oYou must be aware of the difference between historic return and expected return.
Historical Returns
Although it is important to be able to calculate historical returns, we really care about
expected returns, because we want to know how our portfolio will perform from today
Expected Returns
Expected return is the ‘weighted average’ return on a risky asset, from today to some
future date.
To calculate an expected return, you must first:
oDecide on the number of possible economic scenarios that might occur.
oEstimate how well the security will perform in each scenario, and
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