Lecture 6: Portfolio Theory at University Of Exeter | Flashcards & Summaries

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TESTE DEIN WISSEN

What is total portfolio risk made up of?

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Systemic risk and non-systemic risk

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TESTE DEIN WISSEN

What is mean-variance analysis?

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  • It is the analysis of the tradeoff between risk and reward 
  • A method used to construct optimal portfolios
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TESTE DEIN WISSEN

What are the steps of constructing a portfolio?

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1. Fing the weights (w) of chosen assets to give the optimal portfolio p 

2. Use preferences to determine our complete portfolio (the allocation x between risk-free and risky assets)

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TESTE DEIN WISSEN

What is the leverage ratio?

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TESTE DEIN WISSEN

asset/net investment  = worth of the asset 

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TESTE DEIN WISSEN

Why is constructing a portfolio a good idea?

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TESTE DEIN WISSEN
  • We can't rely on a single stock providing high returns so we can invest into a number of stocks to diversify our portfolio risk away
  • Investors want portfolios with low risk and high reward 
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TESTE DEIN WISSEN

How is risk diversified away in portfolio?

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TESTE DEIN WISSEN

To reduce risk portfolios are constructed from assets that are not perfectly correlated with the market, their return is not completely reliant on the market

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TESTE DEIN WISSEN

How can we construct a good portfolio?

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TESTE DEIN WISSEN
  • Do not look at past returns to predict future returns 
  • Investors only care about the expected return and volatility of the whole portfolio (not individual stocks)
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TESTE DEIN WISSEN

What information is needed to calculate portfolio variance?

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TESTE DEIN WISSEN
  • Portfolio weights 
  • Individual variances
  • All covariances
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TESTE DEIN WISSEN

How do positive and negative covariances affect portfolio variance?

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TESTE DEIN WISSEN
  • Positive covariance increase portfolio variance
  • Negative covariance decrease portfolio variance
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TESTE DEIN WISSEN

What is systemic risk?

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TESTE DEIN WISSEN

Risk that cannot be diversified by adding assets to a portfolio. 

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TESTE DEIN WISSEN

What is the minimum variance boundary?

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TESTE DEIN WISSEN

The graph plotting all possible combinations of risk and return

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TESTE DEIN WISSEN

How are best portfolio weights chosen?

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TESTE DEIN WISSEN

All feasible portfolios lie inside the minimum-variance boundary, and rational investors should select portfolios from the efficient frontier to maximise their returns given risk faced

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Q:

What is total portfolio risk made up of?

A:

Systemic risk and non-systemic risk

Q:

What is mean-variance analysis?

A:
  • It is the analysis of the tradeoff between risk and reward 
  • A method used to construct optimal portfolios
Q:

What are the steps of constructing a portfolio?

A:

1. Fing the weights (w) of chosen assets to give the optimal portfolio p 

2. Use preferences to determine our complete portfolio (the allocation x between risk-free and risky assets)

Q:

What is the leverage ratio?

A:

asset/net investment  = worth of the asset 

Q:

Why is constructing a portfolio a good idea?

A:
  • We can't rely on a single stock providing high returns so we can invest into a number of stocks to diversify our portfolio risk away
  • Investors want portfolios with low risk and high reward 
Mehr Karteikarten anzeigen
Q:

How is risk diversified away in portfolio?

A:

To reduce risk portfolios are constructed from assets that are not perfectly correlated with the market, their return is not completely reliant on the market

Q:

How can we construct a good portfolio?

A:
  • Do not look at past returns to predict future returns 
  • Investors only care about the expected return and volatility of the whole portfolio (not individual stocks)
Q:

What information is needed to calculate portfolio variance?

A:
  • Portfolio weights 
  • Individual variances
  • All covariances
Q:

How do positive and negative covariances affect portfolio variance?

A:
  • Positive covariance increase portfolio variance
  • Negative covariance decrease portfolio variance
Q:

What is systemic risk?

A:

Risk that cannot be diversified by adding assets to a portfolio. 

Q:

What is the minimum variance boundary?

A:

The graph plotting all possible combinations of risk and return

Q:

How are best portfolio weights chosen?

A:

All feasible portfolios lie inside the minimum-variance boundary, and rational investors should select portfolios from the efficient frontier to maximise their returns given risk faced

Lecture 6: Portfolio Theory

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