11. Diversification and Risky Asset Allocation. Interviews with Chevron…Thursday.
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Diversification and Risky Asset Allocation
Note that the second spreadsheet is only for Starcents. What would you get for Jpod?
In the formula: E(RP) = expected portfolio return
wi = portfolio weight in portfolio asset i
E(Ri) = expected return for portfolio asset i
Note that the portfolio weight in Jpod = 1 – portfolio weight in Starcents.
ps = probability of state of economy, s
E(Rp,s) = expected portfolio return in state s
E(Rp) = portfolio expected return
Where: xA = portfolio weight of asset A
xB = portfolio weight of asset B
such that xA + xB = 1.
(Important: Recall Correlation Definition!)
Uh,is this decision a wise one?