Microsoft PowerPoint - PoF.ppt

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Minimum variance and efficient setƒ 31

A better method for diversification

ƒ

Find out the portfolio weights that

minimize the portfolio variance

for a given expected portfolio return
ƒ

For any two assets, plotting return

and standard deviation for all

feasible portfolio weights yields the

combination line

for these

assets

ƒ

Assume the following expected returns and standard deviations for two

uncorrelated

securities:

Single-period random cash flows: Mean-variance portfolio theory


2

2

2

2

(^10) ,
0
)
(^1) (
(^05) ,
0
)
(
A
A
P
x
x
r



  • =
    σ
    (^04) ,
    (^0) )
    (^1) (
    (^10) ,
    0
    ]
    [
    A
    A
    P
    x
    x
    r
    E


  • =
    AB
    E(r)
    0.10
    0.04
    SD(r)
    0.05
    0.10
    Security



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