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E-Commerce is taking over the traditional commerce practices. It is of special concern for the IT students. Following are the key points of these Lecture Slides : Risky Assets, Portfolio Consists, Plot, Broken Egg, Risky, Shell Shape, Return Profile, Maximize Return, Efficient Frontier, Investor
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When the portfolio consists of many riskyassets, they form a plot similar to a broken eggshell shape
Each dot within the broken egg shell shaperepresents the risk/return profile for a singlerisky asset or portfolio of risky assets
To maximize return per unit of risk assumed, aninvestor would always choose an asset orportfolio that plots along the efficient frontier
R You would never choose Asset A, as you can earn ahigher return with similar risk by choosing the assetthat plots along the Efficient Frontier. A σ A Return Standard Deviation A
When a risk-free asset (Treasury Bill) isintroduced into the set of risky assets, a newefficient frontier emerges
This new efficient frontier is known as theCapital Market Line (CML)
The CML represents all possible portfolioscomprised of Treasury Bills and the MarketPortfolio
R M σ M Return Standard Deviation A R f Capital Market Line
We know:
Investors should split their assets betweenTreasury bills and the market portfolio - To reduce risk, invest a greater proportion ofassets in Treasury bills - To enhance expected return, invest a greaterproportion of assets in the market portfolio
We do not know how to calculate the expected return (and hence the price) for a single riskyasset
The Capital Asset Pricing Model is needed
We need to measure the Market risk that cannotbe diversified away Unique or Non-systematic Risk Market or Systematic Risk Diversifiable Non- Diversifiable Total Standard Deviation (or Risk)
Systematic, or non-diversifiable, risk is causedby factors affecting the entire market
interest rate changes - changes in purchasing power - change in business outlook
Unsystematic, or diversifiable, risk is caused byfactors unique to the firm
strikes - regulations - management’s capabilities
