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This chapter introduces modern portfolio theory in a simplified setting where there are only two risky assets and a single risk- free asset. Portfolio theory and risk management with its emphasis on examples, exercises and calculations, this book suits advanced undergraduates as well as postgraduates and practitioners. It provides a clear treatment of the scope and limitations of mean- variance portfolio theory and introduces popular modern risk measures. Chapter 1 introduction to portfolio theory updated: aug. My work on portfolio theory considers how an optimizing investor would behave, whereas the work by sharpe and lintner on the capital asset pricing model ( capm for short) is concerned with economic equilibrium assuming all investors optimize in the particular manner i proposed. 1 video 06a, return of an investment. Non- diversifiable risks optimal portfolio selection introduction and overview in order to understand risk- return trade- off, we observe: risks in individual asset returns have two components:. 80 the journal of finance yl, be pl; that y = y2 be pz etc. Main issues returns of portfolios diversification diversifiable vs. It is one of the most important and influential economic theories dealing with finance and investment. Basics of portfolio theory goals: after reading this chapter, you will understand the basic reason for constructing a portfolio.
Develop the basic formulas for two-, three-, and n- security portfolios. Calculate the risk and return characteristics of a portfolio. 1 portfolios of two risky assets consider the following investment problem. Part d introduction to derivative securities. It is an investment theory based on the idea that risk- averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward. The expected value ( or mean) of y is defined to be the variance of y is defined to be v is the average squared deviation of y from its expected value. Portfolio theory.
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