15.053 Lecture Notes - Lecture 6: Order Of Newfoundland And Labrador, Maxima And Minima, Covariance
Document Summary
Assumption: stock returns are independent of each other (uncorrelated) Note: nancial models of risk doe not always re ect a person"s true preference. You have a 90% chance of winning ,000,00. You have a 10% chance of losing ,000. You have a 50% chance of winning ,000,000. You have a 50% chance of winning ,00. X = 5-year return on investing in ibm. X = 5-year return on investing in prudential. X = 5-year return on investing in raytheon. I = proportion of the portfolio invested in ibm. P = proportion of the portfolio invested in prudential. R = proportion of the portfolio invested in raytheon. Variance of the entire portfolio: var[w] = i var[x ] + p var[x ] + r var[x ] = = (sd(w)) . Minimize var(w) = 225i + 324p + 100r subject to. Constraint 1: i + p + r = 1. Constraint 2: e(w) = 65i + 80p + 50r 65.
