Foundations of Finance: Asset Allocation: Risky vs. Riskless Prof. Alex Shapiro 1 Lecture Notes 6 Asset Allocation: Risky vs. Riskless I. Readings and Suggested Practice Problems II. Expected Portfolio Return: General Formula III. Standard Deviation of Portfolio Return: One Risky Asset and a Riskless Asset IV. The Asset Allocation Framework V. The Capital Allocation Line VI. Portfolio Management: One Risky Asset and a Riskless Asset VII. Additional Readings Buzz Words: Reward to Variability Ratio, Separation Theorem, Portfolio’s Risk Adjustment, Portfolio ManagementFoundations of Finance: Asset Allocation: Risky vs. Riskles 2 I. Readings and Suggested Practice Problems BKM, Chapter 7 Suggested Problems, Chapter 7: 8, 18-23. A useful example from the Additional Readings: Investment Advice from Wall Street Two annual recommendations from Morgan Stanley (as reported in the WSJ) Stocks Bonds Cash % in Complete Port. % in Complete Port. % in Comp [% in the risky part] [% in the risky part] Year 1 65 15 20 [81.25] [18.75] Year 2 80 20 0 [80] [20] In this and subsequent lectures, we want to understand: - How to chose the relative weights, in [brackets] above, of “Stocks” and “Bonds” (or any other two risky assets that make up the risky portion of your complete portfolio). - What is the role of “Cash” (i.e., the riskless asset within the portfolio, such as a money market
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