Diversification and Risky Asset Allocation

Flashcards on Diversification and Risky Asset Allocation, covering expected returns, portfolio diversification, and the efficient frontier.

Diversification

Holding many investments so that some increase in value while others decrease, reducing overall risk.

Efficiently Diversified Portfolio

A portfolio that has the highest expected return, given its level of risk.

Expected Return

The weighted average return on a risky asset from today to some future date.

Expected Risk Premium

The difference between the expected return on a risky asset and the certain return on a risk-free investment.

Variance of Expected Returns

A measure of the dispersion of possible returns around the expected return.

Portfolios

Groups of assets, such as stocks and bonds, held by an investor.

Portfolio Weights

The proportion of the total value of the portfolio that is invested in each asset.

Fallacy of Time Diversification

The incorrect argument that volatility cancels out over time when investing in stocks.

Correlation

The tendency of the returns on two assets to move together.

Investment Opportunity Set

The possible combinations of risk and return available from portfolios of two assets.

Efficient Portfolio

A portfolio that offers the highest return for its level of risk.

Markowitz Efficient Frontier

The set of portfolios with the maximum return for a given level of risk and the minimum risk for a given level of return.