11. Diversification and Risky Asset Allocation. Interviews with Chevron…Thursday.
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?