BFF2140 Lecture 9: BFF2140 – Week 9 Lecture Risk and Return II Portfolio Theory and Capital Asset Pricing Model
Document Summary
Calculate expected returns and volatility of a portfolio. Explain the relation between systematic risk and the market portfolio. Understand the capital asset pricing model and use it to compute the cost of equity capital for stocks. For a diversified portfolio, the variance of the individual assets contributes little to the risk of the portfolio. The risk depends largely on the covariance between the returns on the assets. Portfolio risk: the case of 3 risky assets. Portfolio risk: the case of n risky assets. As more shares are added, each new share has a smaller risk-reducing impact. By forming portfolios, we can eliminate some of the riskiness of individual shares. However, there is a minimum level of risk that cannot be diversified away and that is known as systematic risk. Bff2140 week 9 lecture: risk and return ii: portfolio theory and capital asset pricing model (1) calculating portfolio risk/return two stock case.
