FINA 385 Study Guide - Final Guide: Risk Premium, Expected Return, Risk Aversion
Document Summary
Formulas for the final: an estimate of expected return, variance and covariance of returns based on historical data. !t=1 (rxt rx )(ry t ry : variance of portfolio with two risky assets a and b p = w2. B + 2wawb a b ab: equation for the capital allocation line. E(rc) = rf + y[e(rp ) rf : standard deviation of complete portfolio. C = y p: optimal fraction of complete portfolio allocated to portfolio p in the market with t-bills and portfolio. P: utility of an investor when his capital allocation is optimal. P: optimal weight of risky asset 2 in the risky portfolio with two risky assets 1 and 2 in the market with no t-bills w . 2 2cov(r1, r2): optimal weight of risky asset 2 in the risky portfolio with two risky assets 1 and 2 in the market with. M where a is an average coe cient of risk aversion.