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Quantitative Portfolio Management - Homework 1 - Case Study Example

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To the extreme cases of perfect positive () and perfect negative () correlation: This will be variant to the extent of correlation between assets making up the portfolio. Using the assumption that we have two assets (1 and 2)
There are two types of observations: for the perfect…
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Quantitative Portfolio Management - Homework 1
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From the graph, Roy (1952) argued that investors should pick portfolios in order to maximize the likelihood of getting above some threshold minimum return.. Drawing a straight line from this minimum return tangent to the efficient frontier. Lower thresholds result in optimal portfolios with less return / risk, once you have identified the efficient frontier Using the idea that risks come from different sources, a “single index model” assumes that actual returns can be separated into systematic (i.e. market-related) and firm-specific parts … here, the “market” (e.g. S&P500 index) is the source of market-related movements in security i: Since there is no perfect match for this assets, that various portfolio combinations of most two-asset portfolios will lie on a curve to the left as you reduce correlation between pairs of assets, you will have to risk for a given level of portfolio return.

Result: One portfolio (P) dominates all of the other efficient portfolio on the efficient set Investors who choose combinations of P and the risk-free asset get the highest return for a given level of risk, compared to all other risky

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