MGT 200 Lecture Notes - Lecture 1: Standard Deviation, Capital Asset Pricing Model, Market Risk
Document Summary
Based off the market portfolio all the assets in the universe. Total risk = unsystematic risk + systematic risk. Standard deviation = beta (from capm) + variance of the disturbance (actual expected) More assets = more likely that the movement of the assets cancel each other out. Total risk of the portfolio decreases, but at a decreasing rate when # of assets increases. Method 1: find er of each asset er = p1r1 + p2r2. Er of stocks = . 3(-0. 11) + . 4(0. 13) + . 3(0. 27) = . 1. Er of bonds = . 3(0. 16) + . 4(0. 06) + . 3(-. 04) = 0. 06: find er of each portfolio by applying the probabilities er = wa * era + wb * erb. Er of portfolio = . 6*. 1 + . 4*. 06 = 8. 4% Method 2: find er for each outcome. E recession = . 6*-. 11 + . 4*0. 16 = -. 002. E boom = . 6*. 27 + . 4*-. 04 = . 146: find er for each portfolio by applying the probabilities.
