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<h2 class="hd hd-2 unit-title">Motivation</h2>
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<h3 class="hd hd-2">Motivation</h3>
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<h2 class="hd hd-2 unit-title">Mean-Variance Analysis I</h2>
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<h3 class="hd hd-2">Mean-Variance Analysis I</h3>
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<h2 class="hd hd-2 unit-title">Mean-Variance Analysis II</h2>
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<h2 class="hd hd-2 unit-title">Exercise: Mean-Variance Analysis</h2>
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Exercise: Mean-Variance Analysis
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You have decided to invest all your wealth in two mutual funds: A and B. Fund A has an expected return of 15% with a standard deviation of 20%. Fund B has an expected return of 11% with a standard deviation of 16%. Their correlation is 0.4.</p>
<ol>
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<p>
You want your total portfolio to yield an expected return of 12%. What percentage of your wealth should you invest in A and B? (<i class="it">Note</i>: Your answers should be numbers in percentage form. Do not enter '%'.)</p>
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<p>
What will be the standard deviation of the return on your portfolio? (<i>Note</i>: Your answer should be a number in percentage form. Do not enter '%'.)
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<h2 class="hd hd-2 unit-title">Exercise: Portfolio Theory</h2>
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True or false. Proper diversification can reduce or eliminate systematic risk.
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<p>
True or false. Diversification reduces the portfolio's expected return because it reduces the portfolio's total risk.
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<p>
True or false. Diversification can reduce risk only when asset returns are negatively correlated.
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<p>
True or false. Diversification means that the equally weighted portfolio (i.e., if you have N assets, your weights are all equal to 1/N) is optimal.
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True or false. Optimal portfolios will always exclude individual assets whose expected return and risk (as measured by its standard deviation) are dominated by other available assets.
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<h2 class="hd hd-2 unit-title">Interactive: Diversification</h2>
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<p style="text-align: left;">The graph below shows the Sharpe ratio multiplier that results from diversification. What happens when you increase the number of assets in the portfolio? What happens if these assets are highly, positively correlated?</p>
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