Financial Markets: 1. Portfolio theory

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  • Created by: charlie
  • Created on: 13-01-18 14:44
Utility Function
measure to compare portfolios with different risk and expected return from investors point of view
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Indifference curve
Set of portfolios giving same utility level
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Capital allocation line (CAL)
Shows risk-return combinations available to investors in the market
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Sharpe ratio
Slope of CAL (reward for increasing risk)
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Optimal allocation to risky asset (y*)
.
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Expected return (2 risky assets)
.
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Variance (2 risky assets)
.
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Standard deviation (2 risky assets)
.
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Weights of risky assets (using SD)
.
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Finding optimal risky portfolio (Tangency portfolio) (P): STEP 1
Optimal weights of 2 risky assets
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Finding optimal complete portfolio (Tangency to I.C) (C): STEP 2
Deciding where to sit on CAL (y*)
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Correlation (2 risky assets)
.
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Expected return (>2 risky assets)
.
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Variance (>2 risky assets)
.
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Other cards in this set

Card 2

Front

Indifference curve

Back

Set of portfolios giving same utility level

Card 3

Front

Capital allocation line (CAL)

Back

Preview of the front of card 3

Card 4

Front

Sharpe ratio

Back

Preview of the front of card 4

Card 5

Front

Optimal allocation to risky asset (y*)

Back

Preview of the front of card 5
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