Академический Документы
Профессиональный Документы
Культура Документы
COURSE MATERIAL
Capital Allocation
Asset Allocation
Security selection
rP wD rD wE rE
(1)
(2)
Cov(rD , rE ) DE D E
(4)
P wD D wE E
(DE =-1 ), P = 0
P wD D wE E
(5)
E
wD
D E
D
wE
1 wD
D E
(6)
SP
E (rP ) rf
8wD 13wE
max S
wi
E (rp ) rf
, wi 1
E ( RD ) E2 E ( RE )Cov( RD , RE )
wD
E ( RD ) E2 E ( RE ) D2 [ E ( RD ) E ( RE )]Cov ( RD , RE )
wE 1 wD
Once we have reached this point, generalizing to the case of many risky assets is
straightforward. Before we move on, let us briefly summarize the steps we followed to
arrive at the complete portfolio.
1. Specify the return characteristics of all securities (expected returns, variances,
covariances ).
2. Establish the risky portfolio (asset allocation):
a) Calculate the optimal risky portfolio, P
b) Calculate the properties of portfolio P using the weights determined in step ( a )
3. Allocate funds between the risky portfolio and the risk-free asset (capital
allocation):
Calculate the fraction of the complete portfolio allocated to portfolio P (the
risky portfolio) and to T-bills (the risk-free asset)
Calculate the share of the complete portfolio invested in each asset and in T-bills
Security Selection
As in the two risky assets example, the problem
has three parts. First, we identify the riskreturn
combinations available from the set of risky
assets. Next, we identify the optimal portfolio of
risky assets by finding the portfolio weights that
result in the steepest CAL. Finally, we choose
an appropriate complete portfolio by mixing the
risk-free asset with the optimal risky portfolio
E (rp ) wi E (ri )
i 1
p2 wi w j Cov(ri , rj )
i 1 j 1
wi w j Cov(ri , rj )
2
p
i 1 j 1
2
i
n
n
1
Cov
Cov(ri , rj )
n(n 1) j 1 i 1
j i
Portfolio variance as
1 2 n 1
Cov
n
n
2
p
RISK SHARING
Risk sharing, the act of selling shares in
an attractive risky portfolio to limit risk and
yet maintain the Sharpe ratio (profitability) of
the resultant position. Suppose that every
time a new risky asset is added to the
portfolio