Reading 83: Portfolio Risk and Return: Part 1

Book 4: Portfolio Management

Which asset class has returned the greatest yield since 1926?

small-cap equities

Which asset class has returned the lowest yield since 1926?

TBills

Do returns follow a normal distribution?

no

negative skew with greater than normal kurtosis

Utility Functions

represent investors’ preferences regarding the trade-off between risk and return

Indifference Curve

plots combinations of risk and expected returns among which an investor is indifferent

Two Fund Separation Theorem

all investors’ optimal portfolios will be made up of some combination of the optimal portfolio of risky assets and the risk-free asset

Capital Allocation Line

the line representing these possible combinations of risk-free assets and the optimal risky asset portfolio

What is the SD if both assets are perfectly correlated with each other?

w1s1+w2s2

the s should be populated SD (sigma)

Efficient Frontier

portfolios that return the greatest amount of return for a given level of risk

Global Minimum-Variance Portfolio

the portfolio on the efficient frontier that has the least risk