Investment Week 4

1. Diversification benefit is the total risk being less than the sum of the individual
risk contributions
2. Investment opportunity set for two stocks is derived from their risk-return
characteristics and their correlation.
3. Capital Allocation Line shows different combinations of a risky asset and a
risk free asset.
4. Now, we want to change the risky asset into combinations of other assets
change the risky asset into optimal risky portfolio
Combine multiple investment classes to create a new risky asset
depend on the proportions in which the funds are combined.
Minimum-variance portfolio the portfolio at the leftmost point
Investment Opportunity Set shows the risk-return trade off for a range
of risky portfolios with the same two assets but using different proportions
of the assets.
We can draw the CAL using the straight line that passes through the point
where 100% of the complete portfolio is invested in the risky asset.
Our goal is to find the highest Sharpe ratio make the CAL steeper until
it is tangent to the Investment Opportunity Set.
Optimal Portfolio or Tangency Portfolio is the optimal combination of
stocks and bonds which if we connect the line to the risk-free asset, it has
the highest Sharpe ratio.
5. The set of portfolios made up of combinations of the individual assets in the
securities universe that provide the optimal trade-offs is termed the efficient
frontier
6. A
7.