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A.02.BKM Ch 07
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Diversification & pf risk
Mkt / systematic
: can not be diversified away
Unique / firm-specific / nonsys
: can be eliminated via diversification (as long as Cor < 1)
Pf of 2 risky assets
Pf opportunity set
Graph of all possible combinations of risky assets
Optimal risky pf
Avail pf that has highest Sharpe ratio. Tangent to CAL.
Separation Principle
Selection of opt risky pf independent of A
A influences mix btwn opt risky pf & r
_{f}
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
Risk poolinkg vs Risk sharing
Poooling
: merge uncorrelated assets;
increases
exposure to risk (Sharpe and sd incr by n
^{0.5}
)
Sharing
: share fixed amt of risk among investors. Sharing + pooling
reduces
risk (Sharpe incr by n
^{0.5}
, sd constant)
Long run investment (
time diversification
) equivalent to pooling
Disadvantages of large firms
Need to widen UW stds -> pressure on profit
Impact of UW error compounded
Author
Exam9_2012
ID
134412
Card Set
A.02.BKM Ch 07
Description
Optimal Risky Portfolios
Updated
2012-05-07T17:44:34Z
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