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An Introduction to Portfolio Management An Introduction to Portfolio Management Table of contents 01 02 Some Background Assumptions Markowitz Portfolio Theory Table of contents Alternative Measures of[.]
An Introduction to Portfolio Management Table of contents 01 02 Some Background Assumptions Markowitz Portfolio Theory Table of contents 2 Alternative Measures of Risk Expected Rates of Return A Three-Asset Portfolio Estimation Issues 2.3-2.5 Variance (Standard Deviation) 2.8-2.9 The Efficient Frontier and Investor Utility Some Background Assumptions Maximize the returns for a given level of risk A good portfolio is not simply a collection of individually good investments The relationship among the returns for all full spectrum of investments in the portfolio is important According to the assumption of portfolio theory, are most investors with a large investment portfolio risk-averse or riskpreferred? 1.1 Risk Aversion Most investors with a large investmen t portfolio are risk averse Evidence Most investors purchase various types of insurance Evidence The difference in the required rate of return for different grades of bonds with different degrees of credit risk Investors are NOT completely risk averse regarding all financial commitments Not everybody buys insurance for everything There is the combination of risk preference and risk aversion Because of choice or unaffordable insurance People like to gamble with negative expected returns but buy insurance to protect themselves against large losses 1.2 Definition of Risk The uncertainty of future outcomes The probability of an adverse outcome 02 Markowitz Portfolio Theory