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Exam9_2012
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Diversification & pf risk
 Mkt / systematic: can not be diversified away
 Unique / firmspecific / nonsys: can be eliminated via diversification (as long as Cor < 1)


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}

Minvar frontier
 All pf that have lowest var for each level of E(r)
 Global minvar pf: single asset w lowest var
 Efficient frontier: minvar frontier above minvar 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

