1. Intermediate Investments F3031 Summary to Date Investing is about measuring and understanding the risk/return relationship Risk –Measured through the use of standard deviation –Controlled through diversification The Capital Allocation Line –The Sharpe Ratio (reward to volatility) –The mean-variance criterion –The optimal risky portfolio –The minimum variance portfolio

2. Intermediate Investments F3032 Summary to Date While the return of a portfolio made up of two assets is simply the weighted average, the standard deviation is only a weighted average if the assets are perfectly correlated Otherwise, the standard deviation is something less than the weighted average, showing the benefits of diversification!

3. Intermediate Investments F3033 The Optimal Risky Portfolio Optimal Risky Portfolio (p. 200 has an error) W A = (RP A ) * (VAR Z ) – (RP Z )(SD A )(SD B )(Rho AZ ) --------------------------------------------------------------------------- (RP A )*(VAR Z ) + (RP Z )*(VAR A ) -(RP A +RP Z )(SD A )(SD Z )(Rho AZ )

4. Intermediate Investments F3034 The Minimum Variance Portfolio Minimum Variance Portfolio (p. 197) W A = (VAR Z ) – (SD A )(SD Z )(Rho AZ ) ------------------------------------------------------ (VAR Z ) + (VAR A ) – 2(SD A )(SD Z )(Rho AZ )