Microsoft PowerPoint - PoF.ppt

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