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by: Victoria Carr

F303Week3LectureNotes.pdf BUS-F303

Marketplace > Indiana University > Finance > BUS-F303 > F303Week3LectureNotes pdf
Victoria Carr
GPA 3.2
Intermediate Investments
Veronika Pool

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Intermediate Investments
Veronika Pool
Class Notes
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This 3 page Class Notes was uploaded by Victoria Carr on Friday January 30, 2015. The Class Notes belongs to BUS-F303 at Indiana University taught by Veronika Pool in Winter2015. Since its upload, it has received 140 views. For similar materials see Intermediate Investments in Finance at Indiana University.


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Date Created: 01/30/15
F303 Ian 26 28 Week 3 Lecture Notes Lecture 3 Practice Problems Slide 6 0 Answer always positive because it is the standard deviation which is the square root of variance so it must be positive Slide 7 0 0x W varx 0 0x J 2 2 22 5 18 22 3 5 22 0 0x 2433 Slide 8 0 0x J 3 08752 g 1 08752 g 1375 08752 0 0x 178 Slide 9 0 Answer 1 or 2 could be correct because she did not specify whether looking for the variance or standard deviation 0 ER 55 calculated in previous problem 0 71 552 3gtIlt 5 552 o V 4724 687 Slide 11 o On exam she may give a short sale so it is important to make sure that they add up to 1 0 Answer 19 o ER 92 11 19 Slide 12 i E R 90067 100125 6155 001 ABC p0 ABC 001 UABC iii up J92 02372 12 02952 2 9 1 oolABC Slide 13 0 Government Bond I Expected Monthly Return 42 I Standard Deviation O i E R 9 67 1 42 ii 0237 0 4 0 iii apJ920237212022910 solutions for all the above problems will also be posted on oncourse Lecture 4 Notes Basic Portfolio Theory 0 Slide 4 Portfolio Returns 0 What can the weight be I Long Term 01 I Short sell negative weight so you could have more with a higher weight 0 Slide 5 0 Last piece 0d the first equation is how they move in respect to each other 0 Also with the more assets you have the longer this piece is going to be 0 Slide 6 o How many different portfolios can you have from 2 assets I Infinite number because it depends on the weights of them Slide 9 An Example 0 Both of the 0R are positive so that means they are both risky Slide 10 o E R 615 421 174 Slide 11 Portfolios Risk 0 Risk is highest when perfectly positively correlated and lowest when they are negatively correlated Slide 12 0 Asset 2 is risker but it promises a higher return 0 Slide 13 Perfectly Positive Correlation o The balance between 1 and 2 depend on the risk aversion 0 When the correlation is perfectly positive you can shorten the equa on Up W1O391 W2O392 0 Slide 13 Perfectly Negative Correlation 0 Point on the y axis is when you create a risk free asset 0 You would not invest completely in Asset 1 because you can create a higher return with less risk with a mixture 0 When the correlation is perfectly negative you can simply the equation to up 2 W1 a1 wz 02 but taking the absolute value Slide 14 o No way to simplify this equation because it is a hyperbolic line 0 The higher the positive correlation the less hyperbolic the line will be I There is an excel doc on OnCourse to mess around and see this with Slide 15 0 Short selling will allow the line to go above or below Asset 1 amp 2 Slide 21 Portfolio Risk 0 As you diversify portfolios you limit firm specific risk but the market risk is always going to stay Slide 25 Limits to Diversification 0 Rule of Thumb How many stocks to not have a lot of risk and diversify I 2030 is good because it declines so quickly to that point


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