ECON 25000 Study Guide - Midterm Guide: Investment Banking, Buy Side, Capital Asset Pricing Model

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Company usually buy-side, ib usually sell-side: buy-side v. sell-side determined by company or department"s objective. Ln 2: von neumann morgenstern utility function. Argument is real number: mean-variance utility function. U=e(v)-. 5a(sigma^2: gross return rate v hpr, ear v apr, calculate variance and covariance in two cases. Data out of n periods (historic data) Weight according to state probability: calculate risk premium. Cannot calculate unless utility is same or there exists a preference: given weight and rate of return, calculate portfolio rate of return and variance. Ln 3: diversification, systematic risk, unsystematic risk. When you can and cannot ignore certain kinds of risk: complete portfolio v risky portfolio. Complete adds risk free asset to risky portfolio: t-bill. Assume risk-free asset: asset allocation v capital allocation. Capital is binary (how much in risky v risk-free asset) Asset allocation considers three different asset classes: deriving cal and sr. Calculate w, plug in, result is cal.

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