Sources of risk
Diversification
, 2
A portfolio of two risky assets
Asset allocation (asset class or different assets within a class):
Bonds – risk of duration
Portfolio diversification miracle
, 3
Two risky assets (same std dev.)
Two risky assets (different std dev.)
Perfect correlation: if
our stock goes
up/down, the other
does the same.
Mixing assets can
sometimes lower
your standard dev
(risk)
, 4
Asset allocation example: why buy gold?
Create a portfolio with gold
Portfolios of two risky assets – the theory – the aim