7. How do We Find the Efficient Frontier? Basic Strategy: Find the Standard Deviation(σi) and Mean Return(μi) of every stock Stock i. For any given rate of return, find the minimal standard deviation portfolio that can achieve that return.
10. Use More Than One Basket for Your Eggs The Axiom The Concept of Risk Aversion Revisited Preliminary Steps in Forming a Portfolio The Reduced Security Universe Security Statistics Interpreting the Statistics The Role of Uncorrelated Securities The Variance of a Linear Combination Diversification and Utility The Concept of Dominance
11. The Efficient Frontier Optimum Diversification of Risky Assets The Minimum Variance Portfolio The Effect of a Risk free Rate The Efficient Frontier with Borrowing Different Borrowing and Lending Rates Naive Diversification The Single Index Model
17. Preliminary Steps in Forming a Portfolio Interpret the statistics. 1. Do the values seem reasonable? 2. Is any unusual price behavior expected to recur? 3. Are any of the results unsustainable? 4. Low correlations: Fact or fantasy?
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23. The Efficient Frontier : The Effect of a Riskfree Rate In capital market theory, point M is called the market portfolio. The straight portion of the line is tangent to the risky securities efficient frontier at point M and is called the capital market line. Since buying a Treasury bill amounts to lending money to the U.S. Treasury, a portfolio partially invested in the riskfree rate is often called a lending portfolio.
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25. The Efficient Frontier : Naive Diversification The remaining risk, when no further diversification occurs, is pure market risk. Market risk is also called systematic risk and is measured by beta. A security with average market risk has a beta equal to 1.0. Riskier securities have a beta greater than one, and vice versa.
26. The Efficient Frontier : The Single Index Model A pairwise comparison of the thousands of stocks in existence would be an unwieldy task. To get around this problem, the single index model compares all securities to a benchmark measure. The single index model relates security returns to their betas, thereby measuring how each security varies with the overall market.