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CH 11
CH 11
Chapter 11
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Chapter Outline
11.1 Individual Securities
11.2 Expected Return, Variance, and Covariance
11.3 The Return and Risk for Portfolios
11.4 The Efficient Set for Two Assets
11.5 The Efficient Set for Many Securities
11.6 Diversification
11.7 Riskless Borrowing and Lending
11.8 Market Equilibrium
11.9 Relationship between Risk and Expected Return (CAPM)
1 1 1
E rS 7% 12% 28%
3 3 3
E rS 11%
7% 11%
2
.0324
1
.0205 .0324 .0001 .0289
3
Cov a, b
a b
.0117
.999
.143.082
The variance of the rate of return on the two risky assets portfolio
is
2p wB B wS S 2 wB B wS S BS
2 2
R R U
where
R is the expected part of the return
Now investors can allocate their money across the T-bills and
a balanced mutual fund.
Cov Ri , RM
i
2 RM
Cov Ri , RM Ri
i
2 RM RM
R M RF Marketriskpremium
R i RF i R M RF
Market risk premium
R i RF i R M RF
Expected return on a security = Risk-free rate + Beta of the
security × Market risk premium
Assume i 1, then R i R M
i 1.5 RF 3% R M 10%
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