RSM332H1 Chapter Notes - Chapter 8: Standard Deviation, Modern Portfolio Theory, Expected Return
Document Summary
Shows expected return-risk combinations available by allowing portfolio weights to vary. The greater the number of securities in the portfolio, the greater the relative impact of security co-movements on overall portfolio risk and the lower the relative impact of individual risk. No way underlying securities can be combined to obtain expected return and risk. Not investing some portion and leaving it to earn zero return. Offers lower return for same risk as another portfolio. Segment above e offers best risk-expected return combinations. Efficient frontier: set of portfolios offering highest expected return for given level of risk. Only portfolios that rational, risk-averse investors would hold. Erp = rf + w(era - rf) w = erp -erb / (era - erb) Portfolio risk increases in direct proportion to amount invested in risky asset w = p/ a-free. Erp - erb / era - erb = p/ a. Erp = (era - rf / a) p + rf.
