Professional Documents
Culture Documents
Sesi 5
Sesi 5
to accompany
Chapter 8
Chapter 8 - An Introduction to
Portfolio Management
Questions to be answered:
What do we mean by risk aversion and what
evidence indicates that investors are generally
risk averse?
What are the basic assumptions behind the
Markowitz portfolio theory?
What is meant by risk and what are some of the
alternative measures of risk used in
investments?
Chapter 8 - An Introduction to
Portfolio Management
How do you compute the expected rate of
return for an individual risky asset or a
portfolio of assets?
How do you compute the standard deviation of
rates of return for an individual risky asset?
What is meant by the covariance between rates
of return and how do you compute covariance?
Chapter 8 - An Introduction to
Portfolio Management
What is the relationship between covariance
and correlation?
What is the formula for the standard deviation
for a portfolio of risky assets and how does it
differ from the standard deviation of an
individual risky asset?
Given the formula for the standard deviation of
a portfolio, how and why do you diversify a
portfolio?
Chapter 8 - An Introduction to
Portfolio Management
What happens to the standard deviation of a
portfolio when you change the correlation
between the assets in the portfolio?
What is the risk-return efficient frontier?
Is it reasonable for alternative investors to select
different portfolios from the portfolios on the
efficient frontier?
What determines which portfolio on the efficient
frontier is selected by an individual investor?
Background Assumptions
As an investor you want to maximize the
returns for a given level of risk.
Your portfolio includes all of your assets and
liabilities
The relationship between the returns for assets
in the portfolio is important.
A good portfolio is not simply a collection of
individually good investments.
Risk Aversion
Given a choice between two assets with
equal rates of return, risk averse
investors will select the asset with the
lower level of risk.
Evidence That
Investors are Risk Averse
Many investors purchase insurance for:
Life, Automobile, Health, and Disability
Income. The purchaser trades known costs
for unknown risk of loss
Yield on bonds increases with risk
classifications from AAA to AA to A.
Definition of Risk
1. Uncertainty of future outcomes
or
2. Probability of an adverse outcome
We will consider several measures of risk that
are used in developing portfolio theory
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Expected Rates of Return
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Expected Rates of Return
Portfolio
Probability
0.25
0.25
0.25
0.25
Possible Rate of
Return (Percent)
0.08
0.10
0.12
0.14
Expected Return
(Percent)
0.0200
0.0250
0.0300
0.0350
E(R) = 0.1100
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Weight (Wi )
(Percent of Portfolio)
0.20
0.30
0.30
0.20
Expected Security
Return (Ri )
0.10
0.11
0.12
0.13
Expected Portfolio
Return (Wi X Ri )
0.0200
0.0330
0.0360
0.0260
E(Rpor i) = 0.1150
Table 8.2
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[R
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Variance (
Table 8.3
Expected
Return E(Ri )
Ri - E(Ri )
[Ri - E(Ri )]
0.11
0.11
0.11
0.11
0.03
0.01
0.01
0.03
0.0009
0.0001
0.0001
0.0009
) = .0050
Standard Deviation (
) = .02236
Pi
0.25
0.25
0.25
0.25
[Ri - E(Ri )] Pi
0.000225
0.000025
0.000025
0.000225
0.000500
Tugas
Cari harga saham bulanan (monthly closing
price) + dividen (kalo ada)salah satu
perusahaan selama 1 thun (Des2011
Des2012)
Hitung expected returnnya individu &
portofolio
Hitung risiko individu dan portofolio
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Correlation Coefficient
+1.00
+0.50
0.00
-0.50
-1.00
Covariance
.0070
.0035
.0000
-.0035
-.0070
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setE
(R
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Constant Correlation
with Changing Weights
.10
Case 2
W1 .20
0.00
0.20
0.40
0.50
0.60
0.80
1.00
1.00
0.80
0.60
0.50
0.40
0.20
0.00
f
g
h
i
j
k
l
r ij = 0.00
E(Ri )
0.20
0.18
0.16
0.15
0.14
0.12
0.10
Constant Correlation
with Changing Weights
Case
W1
W2
E(Ri )
E( port)
f
g
h
i
j
k
l
0.00
0.20
0.40
0.50
0.60
0.80
1.00
1.00
0.80
0.60
0.50
0.40
0.20
0.00
0.20
0.18
0.16
0.15
0.14
0.12
0.10
0.1000
0.0812
0.0662
0.0610
0.0580
0.0595
0.0700
2
Rij = +1.00
1
0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.10 0.11 0.12
f
g
With uncorrelated
h
assets it is possible
i
j
to create a two
Rij = +1.00
asset portfolio with
k
lower risk than
1
either single asset
Rij = 0.00
0.05
0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.10 0.11 0.12
f
g
With correlated
h
assets it is possible
i
j
to create a two
Rij = +1.00
asset portfolio
k
Rij = +0.50
between the first
1
two curves
Rij = 0.00
0.05
0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.10 0.11 0.12
Rij = -0.50
j
k
f
2
Rij = +1.00
Rij = +0.50
1
Rij = 0.00
0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.10 0.11 0.12
Rij = -1.00
Rij = -0.50
0.15
0.10
0.05
-
f
2
Rij = +1.00
Rij = +0.50
1
Rij = 0.00
With perfectly negatively correlated
assets it is possible to create a two asset
portfolio with almost no risk
0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.10 0.11 0.12
Estimation Issues
Results of portfolio allocation depend on accurate
statistical inputs
Estimates of
Expected returns
Standard deviation
Correlation coefficient
Among entire set of assets
With 100 assets, 4,950 correlation estimates
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Estimation Issues
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Estimation Issues
Efficient Frontier
for Alternative Portfolios
E(R)
Efficient
Frontier
Figure 8.9
E
(R
port)
E
(
port)
Selecting an Optimal Risky
Portfolio
Figure 8.10
U3
U2
U3
U2
U1
U1
The Internet
Investments Online
www.pionlie.com
www.investmentnews.com
www.micropal.com
www.riskview.com
www.altivest.com
End of Chapter 8
An Introduction to Portfolio
Management
Future topics
Chapter 9