Term
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Definition
1)Market/Systematic/Nondiversifiable Risk: Cannot be diversified away
2)Unique/Firm-Specific/Nonsystematic/Diversifiable risk - can be eliminated by diversifiaction |
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Term
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Definition
σ2p = (1/n)avg(σ2) + [(n-1)/n] * Avg(Cov)
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Term
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Definition
| lowest level of risk for a given return |
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Term
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Definition
wmin(D) = σ2E-Cov(rd,re)/
[σ2E+σ2D - 2Cov(rd,re)] |
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Term
| portfolio opportunity set |
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Definition
| each curve of possible weights between two stocks, with the e(r) vs standard deviation based on the correlation |
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Term
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Definition
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Term
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Definition
| available risky portfolio is the one with highest sharpe ratio (tangent to portfolio oppurtunity set) |
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Term
| weights on d in the optimal risky portfolio |
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Definition
E(RD)σ2E - E(RE)*Cov(rD,rE) /
[E(RD)*σ2E+E(RE)*σ2D-[E(RD)+E(RE)]*Cov(rD,rE)] |
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Term
| Given risk preference A, what is optimal mix of risky and risk free? |
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Definition
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Term
| minimum-variance frontier |
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Definition
| made up of risky portfolios with the smallest variance for each level of return |
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Term
| Difference between asset allocation and security selection |
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Definition
asset allocation is the allocation of a complete portfolio to various asset classes
security selection - select specific securties in order to try and increase returns
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Term
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Definition
| Risk pooling involves merging several uncorrelated projects together - notice it increases the overall risk, even as it increases the Sharpe Ratio. |
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Term
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Definition
| this is taking a fixed amount of risk and sharing it among several investors. This increases the sharpe ratio w/o changing the risk. |
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Term
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Definition
| Find the minimum variance by using the covariance between all the possible stocks, then using optimization to select one with the highest return for standard deviation. |
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Term
| 2 problems with Markowitz |
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Definition
1) As the number of securities increases, the number of variables that need to be calculated increases dramatically
2)Due to the large number of estimates, it is likely some variables are estimated incorrectly, resulting in illogical results. |
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