RSM332H1 Chapter Notes - Chapter 9: Computer Performance, Risk Premium, Risk Aversion
Document Summary
Chapter 9: the capital asset pricing model (capm) 9. 1 the new efficient frontier: portfolios a and b in figure 9-1 are above the minimum variance portfolio (mvp) on the efficient frontier; i. e. , they dominate all other possible portfolios of risky securities. For a given level of risk, portfolios a and b offer the highest expected rate of return possible. Since investors are willing to pay insurance premiums to get out of risky situations, we can conclude that investors will only choose portfolios that are members of the efficient frontier. Equation 9-1 gives the expected return on portfolio p when funds are to be invested in either the risky portfolio a or the risk-free asset rf: Furthermore, since the risk-f(cid:396)ee asset"s (cid:396)etu(cid:396)(cid:374) does (cid:374)ot (cid:448)a(cid:396)(cid:455) (cid:894)sta(cid:374)da(cid:396)d de(cid:448)iatio(cid:374) is ze(cid:396)o a(cid:374)d correlation between rf and a is also zero). Equation 9-2 shows that portfolio standard deviation increases in direct proportion to the amount invested in the risky asset (a):
