PSYO 2770 Lecture Notes - Lecture 12: Situation Two, Fixed Investment, Law And Justice
12 Oct 2017
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Document Summary
Market neutral condition means that a portfolio will not be exposed to market risk if it meet the condition. Market risk is defined as in the capital asset pricing model (capm). Where is the expected return of the portfolio, is the risk free rate, is the market return, and is the portfolio risk exposure to market. In market neutral condition, the of the portfolio is zero, which indicates the change of market return will have no effect on portfolio expected return. However, the market direction is hard to predict, market uncertainty may bring unexpected results to the portfolio. That"s why market neutral condition is important for investors who want to avoid market risk exposure. Each has a and the currency amount in each stock is represented by. If , the portfolio"s expected return will not be affected by the change of market return. Given a portfolio with two stocks, stock a and stock b.
