Microsoft PowerPoint - PoF.ppt

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Minimum variance and efficient setƒ 39

Two Fund Separation Theorem

: combinations of

portfolios on the minimum variance set are again on the minimum variance set
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Remarks

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Once you found any two funds on the efficient set, it is possible to create all other mean-variance ef

ficient portfolios from these 2

funds

Ä

there is no need for anyone to purchase individual stocks

separately!
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It suffices to replicate mean and variance, since the prices of portfolios with the same mean and the same variance have to be the same (law of one price)!

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

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