A.02.BKM Ch 07

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

134412

Card Set

A.02.BKM Ch 07

Description

Optimal Risky Portfolios

Updated

2012-05-07T17:44:34Z

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