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UCLA ECON 106F - Econ 106F Chapter 11 final

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Slide 1Chapter OutlineChapter Outline (continued)Learning ObjectivesLearning Objectives (continued)Learning Objectives (continued)Learning Objectives (continued)Learning Objectives (continued)Learning Objectives (continued)Learning Objectives (continued)11.1 The Expected Return of a Portfolio11.1 The Expected Return of a Portfolio (continued)Textbook Example 11.1Textbook Example 11.1 (continued)Alternative Example 11.1Alternative Example 11.1 (cont’d)Alternative Example 11.1 (cont’d)Alternative Example 11.1 (cont’d)11.1 The Expected Return of a Portfolio (continued)Textbook Example 11.2Textbook Example 11.2 (continued)Alternative Example 11.2Alternative Example 11.2 (cont’d)11.2 The Volatility of a Two-Stock Portfolio11.2 The Volatility of a Two-Stock Portfolio (continued)11.2 The Volatility of a Two-Stock Portfolio (continued)Determining Covariance and CorrelationDetermining Covariance and Correlation (continued)Determining Covariance and Correlation (continued)Figure 11.1 CorrelationTextbook Example 11.3Textbook Example 11.3 (continued)Slide 33Slide 34Textbook Example 11.5Alternative Example 11.5Alternative Example 11.5 (cont’d)Computing a Portfolio’s Variance and VolatilityTextbook Example 11.6Textbook Example 11.6 (continued)Alternative Example 11.6Alternative Example 11.6 (cont’d)11.3 The Volatility of a Large PortfolioDiversification with an Equally Weighted PortfolioSlide 45Textbook Example 11.7Textbook Example 11.7 (continued)Textbook Example 11.8Textbook Example 11.8 (continued)Diversification with General Portfolios11.4 Risk Versus Return: Choosing an Efficient PortfolioSlide 52Slide 53Slide 54Textbook Example 11.9Textbook Example 11.9 (continued)The Effect of CorrelationSlide 58Short SalesTextbook Example 11.10Textbook Example 11.10 (continued)Slide 62Efficient Portfolios with Many StocksSlide 64Slide 65Risk Versus Return: Many StocksSlide 6711.5 Risk-Free Saving and BorrowingInvesting in Risk-Free SecuritiesInvesting in Risk-Free Securities (continued)Slide 71Borrowing and Buying Stocks on MarginTextbook Example 11.11Textbook Example 11.11 (continued)Identifying the Tangent PortfolioIdentifying the Tangent Portfolio (continued)Figure 11.10 The Tangent or Efficient PortfolioIdentifying the Tangent Portfolio (continued)Identifying the Tangent Portfolio (continued)Textbook Example 11.12Textbook Example 11.12 (continued)11.6 The Efficient Portfolio and Required Returns11.6 The Efficient Portfolio and Required Returns (continued)11.6 The Efficient Portfolio and Required Returns (continued)11.6 The Efficient Portfolio and Required Returns (continued)Textbook Example 11.13Textbook Example 11.13 (continued)Alternative Example 11.13Alternative Example 11.13 (cont’d)Expected Returns and the Efficient PortfolioTextbook Example 11.14Textbook Example 11.14 (cont'd)Slide 9311.7 The Capital Asset Pricing ModelThe CAPM AssumptionsThe CAPM Assumptions (continued)Supply, Demand, and the Efficiency of the Market PortfolioTextbook Example 11.15Textbook Example 11.15 (continued)Optimal Investing: The Capital Market LineOptimal Investing: The Capital Market Line (continued)Figure 11.11 The Capital Market Line11.8 Determining the Risk PremiumTextbook Example 11.16Textbook Example 11.16 (continued)Alternative Example 11.16Alternative Example 11.16 (cont’d)Textbook Example 11.17Textbook Example 11.17 (continued)The Security Market LineSlide 111Slide 112Slide 113The Security Market Line (continued)Textbook Example 11.18Textbook Example 11.18 (continued)Alternative Example 11.18Alternative Example 11.18 (cont’d)Summary of the Capital Asset Pricing ModelDiscussion of Data Case Key TopicChapter QuizChapter Quiz (cont’d)Slide 123AppendixAppendix (cont’d)Appendix (cont’d)Chapter 11Optimal Portfolio Choice and the Capital Asset Pricing ModelCopyright ©2014 Pearson Education, Inc. All rights reserved.Chapter Outline11.1 The Expected Return of a Portfolio11.2 The Volatility of a Two-Stock Portfolio11.3 The Volatility of a Large Portfolio11.4 Risk Versus Return: Choosing an Efficient Portfolio11.5 Risk-Free Saving and Borrowing11.6 The Efficient Portfolio and Required ReturnsCopyright ©2014 Pearson Education, Inc. All rights reserved.Chapter Outline (continued)11.7 The Capital Asset Pricing Model11.8 Determining the Risk PremiumAppendixCopyright ©2014 Pearson Education, Inc. All rights reserved.Learning Objectives1. Given a portfolio of stocks, including the holdings in each stock and the expected return in each stock, compute the following:a. portfolio weight of each stock (equation 11.1)b. expected return on the portfolio (equation 11.3)c. covariance of each pair of stocks in the portfolio (equation 11.5)d. correlation coefficient of each pair of stocks in the portfolio (equation 11.6)e. variance of the portfolio (equation 11.8)f. standard deviation of the portfolioCopyright ©2014 Pearson Education, Inc. All rights reserved.Learning Objectives (continued)2. Compute the variance of an equally weighted portfolio, using equation 11.12.3. Describe the contribution of each security to the portfolio.4. Use the definition of an efficient portfolio from Chapter 10 to describe the efficient frontier.5. Explain how an individual investor will choose from the set of efficient portfolios.Copyright ©2014 Pearson Education, Inc. All rights reserved.Learning Objectives (continued)6. Describe what is meant by a short sale, and illustrate how short selling extends the set of possible portfolios.7. Explain the effect of combining a risk-free asset with a portfolio of risky assets, and compute the expected return and volatility for that combination.Copyright ©2014 Pearson Education, Inc. All rights reserved.Learning Objectives (continued)8. Illustrate why the risk-return combinations of the risk-free investment and a risky portfolio lie on a straight line.9. Define the Sharpe ratio, and explain how it helps identify the portfolio with the highest possible expected return for any level of volatility, and how this information can be used to identify the tangency (efficient) portfolio.Copyright ©2014 Pearson Education, Inc. All rights reserved.Learning Objectives (continued)10. Calculate the beta of investment with a portfolio.11. Use the beta of a security, expected return on a portfolio, and the risk-free rate to decide whether buying shares of that security will improve the performance of the portfolio.12. Explain why the expected return must equal the required return.Copyright


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UCLA ECON 106F - Econ 106F Chapter 11 final

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