Economics 434 theory of financial markets
This presentation is the property of its rightful owner.
Sponsored Links
1 / 12

Economics 434 Theory of Financial Markets PowerPoint PPT Presentation


  • 103 Views
  • Uploaded on
  • Presentation posted in: General

Economics 434 Theory of Financial Markets. Professor Edwin T Burton Economics Department The University of Virginia. Modern Portfolio Theory. Three Significant Steps to MPT Harry Markowitz Mean Variance Analysis The Concept of an “Efficient Portfolio” James Tobin

Download Presentation

Economics 434 Theory of Financial Markets

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.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Economics 434 theory of financial markets

Economics 434Theory of Financial Markets

Professor Edwin T Burton

Economics Department

The University of Virginia


Modern portfolio theory

Modern Portfolio Theory

  • Three Significant Steps to MPT

    • Harry Markowitz

      • Mean Variance Analysis

      • The Concept of an “Efficient Portfolio”

  • James Tobin

    • What Happens When You Add a “Risk Free Asset” to Harry’s story

  • Bill Sharpe (Treynor Lintner, Mossin, etal)

    • Put Tobin’s Result in Equilbrium

    • The Rise of Beta

    • The Insignificance of “own variance”


Tobin s result

Tobin’s Result

  • If there is a riskless asset

  • It changes the feasible set

  • All optimum portfolios contain

    • The risk free asset and/or

    • The portfolio E

    • …….in some combination….

  • The Mutual Fund Theorem

James Tobin, Prof of Economics

Yale University

Winner of Nobel Prize in Economics

1981


The risk free asset

The risk free asset

Mean

The one with the highest mean

Standard Deviation


Combine with risky assets

Combine with Risky Assets

Mean

?

Risky Assets

Risk Free

Asset

Standard Deviation


Recall the definition of the variance of a portfolio with two assets

Recall the definition of the variance of a Portfoliowith two assets

 P2 =  (P - P)2

n

= {1(X1- 1) + 2(X2 - 2)}2

n


Economics 434 theory of financial markets

Variance with 2 Assets - Continued

= (1)212 + (2)222 + 2121,2

Recall the definition of the correlation coefficient:

1,2

1,2

12

= (1)212 + (2)222 + 2121,212


Economics 434 theory of financial markets

If 1 is zero

 P2= (1)212 + (2)222 + 2121,212

If one of the standard deviations is equal to zero, e.g. 1 then

 P2 =

(2)222

(2)2

 P =

Which means that:


Combine with risky assets1

Combine with Risky Assets

Mean

Risk Free

Asset

Standard Deviation


Combine with risky assets2

Combine with Risky Assets

Mean

The New Feasible Set

E

Always combines the risk free asset

With a specific asset (portfolio) E

Risk Free

Asset

Standard Deviation


Tobin s result1

Tobin’s Result

Mean

Use of Leverage

E

Risk Free

Asset

Standard Deviation


The end

The End


  • Login