A.02.BKM Ch 07

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  1. Diversification & pf risk
    • Mkt / systematic: can not be diversified away
    • Unique / firm-specific / nonsys: can be eliminated via diversification (as long as Cor < 1)
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  2. Pf of 2 risky assets
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  3. Pf opportunity set
    Graph of all possible combinations of risky assets
  4. Optimal risky pf
    Avail pf that has highest Sharpe ratio. Tangent to CAL.
  5. Separation Principle
    • Selection of opt risky pf independent of A
    • A influences mix btwn opt risky pf & rf
  6. Min-var frontier
    • All pf that have lowest var for each level of E(r)
    • Global min-var pf: single asset w lowest var
    • Efficient frontier: min-var frontier above min-var pf
  7. Risk poolinkg vs Risk sharing
    • Poooling: merge uncorrelated assets; increases exposure to risk (Sharpe and sd incr by n0.5)
    • Sharing: share fixed amt of risk among investors. Sharing + pooling reduces risk (Sharpe incr by n0.5, sd constant)
    • Long run investment (time diversification) equivalent to pooling
  8. Disadvantages of large firms
    • Need to widen UW stds -> pressure on profit
    • Impact of UW error compounded
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A.02.BKM Ch 07
2012-05-07 17:44:34
optimal risky portfolio

Optimal Risky Portfolios
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