Lecture 7 Flashcards
What is “portfolio weight”?
An assets fraction of total investment in the portfolio
= asset value / portfolio value
What characterized an efficient portfolio?
There is no way to reduce the volatility of the portfolio without
lowering its expected return
What characterized an inefficient portfolio?
It is possible to find another portfolio that has higher expected return with the same volatility, or lower volatility for the same expected return
What gives positive portfolio weight?
Taking a long position
What gives negative portfolio weight?
Taking a short position
What happens to the variance formula when a risk-free asset is added to the portfolio?
The variance of the risk-free asset, and its covariance with the risky assets, are both zero.
This only the risky assets variance in the equation
What determines how you move along the line of the tangent portfolio?
How you choose to portion your investment over the risk-free and the risky assets
What does the Sharpe Ratio show?
Compensation per unit of risk
What is a market portfolio?
A portfolio of all risky securities held in proportion to their market capitalization
What does the security market line show?
The linear relationship between a stock’s beta and its expected return
What is alpha?
The difference between a stock’s expected return and its required return according to the CAPM
How do you calculate the beta of a portfolio of assets?
Just calculate the weighted average beta of the securities in the portfolio
