1 / 17

Asset Management

Asset Management. Lecture Two. I will more or less follow the structure of the textbook “Investments” with a few exceptions. These parts of the textbook are omitted: Part IV (fixed income) Part V (security analysis) Part VI (options and other derivatives). Outline for today.

harley
Télécharger la présentation

Asset Management

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Asset Management Lecture Two

  2. I will more or less follow the structure of the textbook “Investments” with a few exceptions. • These parts of the textbook are omitted: • Part IV (fixed income) • Part V (security analysis) • Part VI (options and other derivatives)

  3. Outline for today • Risk aversion and utility • Estimating risk aversion • Markowitz portfolio selection model • How to find the efficient frontier and the optimal risky portfolio with Excel

  4. Risk Aversion and utility values • Risk aversion: a risk-averse investor will reject a fair gamble. • Utility value • Risk-neutral investors • A=0 • Risk lover • A<0

  5. Risk Aversion and utility values A=4 E(r) U=1 A=2 U=0.5 σ

  6. Risk Aversion and utility values

  7. Risk Aversion and utility values Certainty equivalent rate

  8. Estimating A • Consider an insurance policy with a cost of v: • Expected return • Variance • Utility • -v=U

  9. risk premium v

  10. Two-Security Portfolios with Various Correlations • Relationship depends on correlation coefficient -1.0 <r< +1.0 • If r = +1.0, no risk reduction is possible • If r = –1.0, complete risk reduction is possible 100% Stock B return  = -1.0  = 1.0  = 0.2 100% Stock A 

  11. Markowitz portfolio selection model return efficient frontier minimum variance portfolio Individual Assets P

  12. Markowitz portfolio selection model

  13. Markowitz portfolio selection model Indifference curve Capital market line return Separation property: the portfolio manager offers the same risky portfolio to all investors Market portfolio rf  Investors allocate their money across the risk-free asset and the market portfolio Investors borrow at the risk-free rate and invest in the market portfolio

  14. Markowitz portfolio selection model • Sharpe ratio • Excess return / SD of excess return • Reward to volatility • The tangency portfolio has the highest Sharpe ratio

  15. Markowitz portfolio selection model Indifference curve Capital market line return rf 

  16. Markowitz portfolio selection model • How to find the efficient frontier and the optimal portfolio? • Find E(r) for each asset • Find SD for each asset • Find covariance between each pair of assets • As a starting point, assume a weight for each asset • Use Excel Solver as an optimizer

  17. Individual Homework • Construct a portfolio of assets with 5 financial assets • Explain briefly why you choose these assets for your portfolio. • Use recent 36 monthly data to calculate E(r), var(r), and cov. • Report for your minimum variance portfolio and the tangency portfolio: • the weights of assets • expected return, SD and the Sharpe ratio • Repeat the exercise with no-short-sale constraint. • Due on Feb 13. Sent your excel file to Sérgio Gaspar <sergio.gaspar@fe.unl.pt>

More Related