FM - Risk and Risk Aversion 2

Financial Markets and Investments
Module Risk and Risk Aversion
Session No. II
Version 1.0
Material from the published or unpublished work of others which is referred to in the Class
Notes is credited to the author in question in the text. The Class Notes prepared is of 4,279
words in length. Research ethics issues have been considered and handled appropriately
within the Globsyn Business School guidelines and procedures.
FM&I/M2SII/v1.0/301019 Risk and Risk Aversion | Session No.
II
Table of Contents
1. Portfolio Analysis ...................................................................................................... 5
2. Expected Return of a Portfolio ................................................................................. 6
2.1. Expected Return of a Portfolio .............................................................................. 6
2.2. Risk of a Portfolio .................................................................................................. 6
3. Risk Diversification ................................................................................................. 10
4. Portfolio Selection................................................................................................... 11
4.1. Selection of Optimal Portfolio .............................................................................. 12
4.2. Markowitz’s Technique to identify Efficient Portfolio ........................................... 14
4.3. Limitations of Markowitz Model ........................................................................... 14
4.3.1. Large Number of Input Data .....................................................................................14
4.3.2. Complexity ...............................................................................................................14
5. Single Index Model .................................................................................................. 15
6. Multi Index Model .................................................................................................... 15
7. Determination of β................................................................................................... 16
7.1 Determination of β under Regression Method ..................................................... 16
8. Capital Asset Pricing Model ................................................................................... 17
References ................................................................................................................... 21
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List of Figures
Figure 2.1: Expected Return of a Portfolio.................................................................................. 6
Figure 2.2: Covariance Formula ................................................................................................. 7
Figure 2.3: Coefficient of Correlation .......................................................................................... 7
Figure 2.5: Regression Formula ................................................................................................10
Figure 3.1: Graphical presentation of Risk Diversification .........................................................10
Figure 4.1: Graphical presentation of Efficient Frontier..............................................................12
Figure 4.2. Portfolio Selection ...................................................................................................13
Figure 5.1: Single Index Model ..................................................................................................15
Figure 7.1: Formula of Two Constants ......................................................................................17
Figure 7.2: Description of the Variables ....................................................................................17
Figure 8.1: CAPM Formula........................................................................................................19
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1. Portfolio Analysis
Individual security carries the risk return features of its own. The future return of a security is
uncertain. Uncertainty related to the security return possesses risk due to variability of returns.
However, each and every individual needs to averse the risk in the investment process.
Therefore, it is required to observe a suitable process that facilitates an investor to get rid of the
problem of risk. However, it should be kept in mind that state of risk cannot be converted into
totally risk free nature as there are various market factors present in the market that are
responsible to make an investment risky. But minimization of risk is possible. It means there
exists certain way by which risk can be minimized. Portfolio of securities is a way which is used
as a risk reduction tool. When two or more securities are kept in one basket the loss arises from
one security can be compensated by the gain in others. Holding more than one security at a
time enables an investor to spread and minimize risk. Portfolio acts as a holder. The process of
creating such a portfolio is termed as diversification (Faulkenberry, 2019). In other words, the
process of combining securities in a portfolio is called diversification. The function of
diversification is to spread and minimize the risk involved in an investment. The rational investor
always wants to search the most efficient portfolio. The efficiency of the portfolio is evaluated on
the basis of expected return and risk associated with the portfolio. Example of portfolio is given
below:
Consider a hypothetical planet, in which a given year is either under hot or cold wave, either of
which is equally likely to prevail. Let us assume that there are two companies constituting the
entire market – coffee and ice-cream. If the hot wave dominates the planet, the ice-cream
company would register a return of 30%, while the coffee company would register a return of
10%. If on the other hand, cold wave dominates the planet, ice-cream company would register a
return of 10%, while the coffee company would register a return of 30%. What would be your
investment strategy?
Solution:
If we invested in only one of the two companies, our expected return will be 20%, with a
possible risk of 10%. If, we split our investment between the two companies in equal proportion,
half of our investment will earn a return of 30%, while the other half would earn 10%, so our
expected return would still be 20%. But in the second instance there is no possibility of deviation
of returns. Diversification results in 20% expected return without risk, whereas holding individual
securities was yielding an expected return of 20% with a risk factor of 10%.
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2. Expected Return of a Portfolio

It is a process where eligibility of the securities is checked before selecting such securities in the
portfolio. This process also includes to check risk return expectations of these securities. Risk
return expectation of the security is a way where expected rate of return and standard deviation
are usually found out (CFI, 2019).
2.1. Expected Return of a Portfolio

Expected return of a portfolio is measured by multiplying the weight of all individual security with
the respective return of such securities. Sum of the expected securities are considered as
expected portfolio return. In the previously stated example the expected return of the portfolio
can be determined as under:
Under the hot wave the return found in ice cream is 30% and return in coffee is 10%. For
portfolio return it is assumed that weight of the two items is equal.
Expected return will be:

(.50 × .30) + (.50 × .10)
= .15 + .05
=0.20
The formula of the expected return of a portfolio can be expressed in the following manner:
Figure 2.1: Expected Return of a Portfolio
(Brenyah, 2017)
2.2. Risk of a Portfolio

Since expected return is uncertain therefore, it carries risk. The measurement of risk is harder
than measuring expected return of a portfolio. The variance of return is a statistical measure
that is applied in calculating risk of a portfolio. In the portfolio risk process, the riskiness of each
security within the context of the overall portfolio has to be examined. In this examination
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process, it is required to check how the returns of a security move with the returns of other
securities in the portfolio and make the contribution towards overall risk of the portfolio. This
type of risk relationship between the securities of a portfolio is known as interactive risk. The
indication of the interactive risk is gauged through covariance (IG, 2019). It is a statistical
measure that ushers the way security returns vary with each other affects the overall risk of the
portfolio.
The covariance formula can be shown in the following manner:
Figure 2.2: Covariance Formula
(CFI, 2019)
Where CovAB = Covariance between A and B
RA = Return of security A
RB = Return of security B
ṜA = Mean return of security A
ṜB = Mean return of security B
N= Number of observations
There are three types of covariance found in the calculation of interactive risk within the
securities of a portfolio. In case of a portfolio consisting of two securities a standard measure
known as coefficient of correlation is required to be calculated. When the covariance of two
securities are divided by value of two standard deviations coefficient of correlations between two
securities can be obtained.
The formula of Coefficient of Correlation is:
Figure 2.3: Coefficient of Correlation
(Toppr, 2019)
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Where,
rxy = Coefficient of correlation between x and y
Cov xy = Covariance between x and y
σx = Standard deviation of x
σy = Standard deviation of y
or Cov xy = rxy σx σy
Three situations can be arisen from this equation. In case of perfect negative correlation, the
correlation coefficient is represented by -1. Similarly, +1 represents the perfect positive
correlation. The range of correlation coefficient subsists from -1 to +1. A value close to zero
indicates that the returns are independent. The relationship between each security of a portfolio
with others are calculated by applying the technique of covariance of return of each security in
the portfolio. When a portfolio is made up of two securities the following formula is applied.
Figure 2.4: Variance of a Portfolio
(CFI, 2019)
W1 = Proportion of funds invested in the first security
W2 = Proportion of funds invested in the second security
σ12 = variance of first security
σ22 = variance of second security
r12 = Correlation coefficient between the returns of the first and second security.
When we make the square root of the variance we will get standard deviation.
There are two sets of factors observed in the analysis of return and risk in a portfolio. The
nature of the first factor is parametric. The term parametric denotes that investor has no control
over the returns, risks and covariance of the individual security. The nature of second factor is
non-parametric. These factors are choice variables because investors get the liberty to choose
the proportions as per their choice. The proportion of investment in each security is the liberty of
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the investor who wants to invest in the portfolio. However, he has to manage the interactive risk
that happens between the shares in portfolio.
In case of perfect positive correlation ship risk reduction does not happen. Instead of risk
reduction risk averaging takes place. In this situation portfolio risk cannot be lower than the
individual security risk. Regarding diversification, we have known that this is a kind of tool which
is capable to reduce the risk of the portfolio. Therefore, the result of positive correlation ship
among the securities does not match the principle of diversification. On the other hand, when
the returns of the securities are perfectly negatively correlated the entire portfolio consisting of
the securities become totally risk free. However, practically this type of situation never happens
in the performance of a portfolio. Again in the rules of diversification it is observed that total
riskless situation never arises. Riskless situation in the market is not possible as risk in the
market consists of market risk and unique risk. The market risk cannot be fully washed out by
applying diversification. Therefore, the theory of perfectly negatively correlation ship between
the returns of the securities in the portfolio do not match with the theory of diversification. When
the returns are uncorrelated the correlation coefficient would be zero. This is a sort of
relationship between the securities in the portfolio which matches the principle of diversification.
Here the reduction of risk falls under the risk of the individual shares inserted in the portfolio. At
the same time the reduction of portfolio risk is justified with the risk performance occurred
through diversification. The rule of diversification when applied in a portfolio it enables the
portfolio becoming less risky. However, there is a limit of reduction of risk in the process of
diversification. The effects of diversification are exhausted rapidly. Most of the reduction in
portfolio standard deviation occurs when the range between 25 to 30 shares are included in the
portfolio. If more shares are included in portfolio it results only marginal reduction portfolio
standard deviation (Statistics how to, 2019).
Correlation coefficient can be determined in the following manner:
𝐶𝑂𝑉 𝑥𝑦
Rxy = 𝜎𝑥 ×𝜎𝑦
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Or alternatively Rxy can be determined in the following manner:
Figure 2.5: Regression Formula
(Investment Cache, 2019)
3. Risk Diversification
In the last section it is narrated that benefits of diversification are limited. Risk consists of two
components. One is market related risks and another is unique risk also known as unsystematic
risk. Unsystematic risk arises from the portfolio can be cancelled. When the size of the portfolio
increases the risk of such portfolio decreases. However, when the portfolio reaches certain limit
the unsystematic risk does not remain in portfolio. Only systematic risk or the market related risk
prevails in portfolio. This type of risk cannot be eliminated. By adding new shares in the portfolio
is not a justified way of risk reduction in portfolio. It is because the size of portfolio has already
crosses the limit where unsystematic risk is already used (Zacks, 2019).
Figure 3.1: Graphical presentation of Risk Diversification
(Bernstein, 2000)
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The figure shows the decline of risks of a portfolio when shares are added in portfolio. But the
risk reduction ceases when unsystematic risk is fully eliminated from the portfolio.
4. Portfolio Selection
Each and every investor wants to choose the optimal portfolio. Optimal portfolio refers to the
portfolio which is made up with highest return and lowest risk. Harry Markowitz is regarded as
the pioneer who had first shown the analytical tool to determine the optimal concept of portfolio
selection. He introduced the concept of opportunity set. This concept displays that limited
number of securities can create large number of portfolios in different combinations. These
feasible set of portfolios in which the investor may possibly invest is known as opportunity set.
Among the umpteen number of portfolios under an opportunity set the investor does not choose
all the portfolios. He chooses specific portfolios in the opportunity set known as efficient
portfolios. The other unchosen portfolios are called inefficient portfolios. In selecting efficient
portfolios, the emphasis is given to check the expected return and standard deviation of these
portfolios. Therefore, the theory of optimal portfolio is required to check in this process. Efficient
portfolio follows the basic two tenets:
 Given two portfolios with same expected return, the investor would prefer the one with the
lower risk.
 Given two portfolios having same risk, the investor would prefer the one with the higher
expected return.
The above stated criteria are based on the following assumptions:

 Investors’ decisions are based on risk and return
 Risk and return are linearly related
 Investors are risk averse
 Investors try to maximize return.
 Investors have identical expectations
 Investors are rational
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Figure 4.1: Graphical presentation of Efficient Frontier
(Beasley, 2019)
In the XY graph table X axis denotes risk and Y axis denotes return to the portfolio. The shaded
area contains numerous portfolios. However, a particular curve region where point P, Q, S, V
and W rest is the best frontier. It is so regarded because at any point the principal desire of the
investor is fulfilled. The goal of the investor is to obtain highest return against minimum risk.
Point P denotes a particular nature of investor who can be said as a most risk averse investor.
Point W denotes such nature of investor who wants maximum return. Considering these two
extreme points this frontier can be analyzed as the best frontier. If we compare point P with any
other portfolios made up in the same alignment parallel to X axis we shall never observe any
better result to the result observed in point P. Again if we compare point W with any other
portfolios made up in the same alignment parallel to Y axis we shall never obtain any better
result to the result that we observe in point W. Thus the boundary of the shaded area is called
the efficient frontier. It contains all the efficient portfolios in the opportunity set. It is a concave
curve in the risk return space that extends from the minimum risk portfolio to the maximum
return portfolio (Moneychimp, 2019).
4.1. Selection of Optimal Portfolio

In the earlier section we have got a particular curve which provides all the efficient portfolios in
the opportunity set. Now it is required to choose a particular portfolio lying on the efficient
frontier. Selection of particular portfolio requires to consider investor’s degree of aversion to risk.
An investor who seeks to avoid the lowest degree of risk should select the lower left hand
segment of the portfolio. Conversely, a risk taking investor seeking higher return should choose
the upper right hand segment. The selection of the optimal portfolio thus depends upon the risk
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aversion nature of the investor and risk tolerance nature of the investor. The best point of
choosing the portion of the efficient portfolio that represents the balance between the level of
risk aversion and risk tolerance requires to consider utility curves. These curves are also called
indifference curves. Each curve represents different combinations of risk and return. It is
assumed that investors are equally satisfied by choosing any portion of such curve. Each
successive curve moving upwards to the left holds the higher level of utility. Since the object of
the investor is to achieve maximum return from its investment so he has to select an upward
utility curve among different utility curves shown in a graph (Niyaz, 2019). The optimum portfolio
is that point where the upward utility curve, selected by an investor, touches the optimal portfolio
curve.
Figure 4.2. Portfolio Selection
(Megha, 2013)
In this graph the efficient frontier touches I2 utility curve at point ‘O’. This point represents
optimal portfolio.
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4.2. Markowitz’s Technique to identify Efficient Portfolio

The first step under the process is the calculation of risk and return of all the possible portfolios.
In doing so it is required to determine the expected return of the securities as well as risk of the
same. Additionally, interactive risk among the securities is required to be observed. It means
covariance is to be measured. Covariance is a measure which shows how returns of two
securities move together. In case of portfolio consisting of more than two securities it is required
to create variance-covariance matrix. Matrix represents pair of two securities. The covariance of
pair of securities is required to be multiplied with respective weight of the two securities. All the
products of the total number of matrix are added up which produces portfolio variance. When
the calculation of risk and return of all the possible portfolios is over the next step is to use
quadratic programming to determine least risk portfolio against any specific value of expected
portfolio return. In this way, from other expected portfolio returns minimum risk portfolio can be
determined with the help of quadratic programing. Repetition of the process using different
values of expected return different figure of minimum risk portfolios can be obtained. The
resulting minimum risk portfolios constitute the set of efficient portfolios (Niyaz, 2019).
4.3. Limitations of Markowitz Model

There are two illustrations of the limitations of Markowitz model. These are:
4.3.1. Large Number of Input Data

In order to apply the quadratic programing formula, the large number of input data is required.
There may be N number of securities present in a portfolio. It is required to determine N return
estimates, N variance estimates and N(N-1)/2 covariance estimates. Total number of input is
2N+[N(N-1) / 2]. It is observed that for a set of 500 securities the requirement of total number
input is 125750. Due to the requirement of huge number of data it is really difficult to use the
quadratic programing formula (Sodhganga, 2019).
4.3.2. Complexity
There are huge number of computations to be executed for N number of securities in a portfolio.
The computations are also complex in nature. The identification of efficient portfolios can be
made by applying quadratic programming. Quadratic programming is very complex and is hard
to be followed. The hardship lies on its complexity. In practical application, this formula is very
difficult to be used. For practical application simplification is required over this programing
process. Once the computational procedure becomes simplified it can enable the user to select
optimal portfolio smoothly. The smooth sail of computation is possible in the presence of index
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models into the process of simplification. One such model is known as simple index model.
Another form of simplification can be achieved by adopting Multi-index model.
5. Single Index Model

The market movement put a great impact in the movement of stock prices. The general
accepted rule is that when the market goes high the movement of share price also follows the
movement of the market. Movement of the market is identified by the indices in the respective
stock exchange. The co-movement of stocks in the same alignment with market indices can be
studied under a certain formula called simple linear regression analysis. The formula is laid
down below:
Figure 5.1: Single Index Model
(Finance Train, 2019)
ri denotes returns on an individual stock.
rm denotes returns on the market
αi denotes return of security i which is independent of the performance of the market.
βi is a constant
ei denotes residual return
Returns on individual return is a dependable return and returns on the market is an independent
component. Both are variables.
This model is also known as Sharpe Index Model. The advantage of this model is - instead of
considering [N(N-1)/2]covariance this model requires only N measures of beta coefficients
(Finance Train, 2019).
6. Multi Index Model

In the single index model only one factor is considered while calculating the return on stock.
This factor is termed as market. However, apart from market factor there exist other factors that
cause stocks to move together. The function of multi index model is to identify the non-market
factors or extra factors which influence the return of the stock. Extra market factors are the
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factors, other than the market, which are also helpful to show the common movement in stock
prices. There are several economic factors present in the market which play vital role in showing
the movement of the securities in the market. Inflation, real economic growth, interest rates etc.
are considered as important factors which are responsible for the movement stock in the
market. The formula is laid down below:
Ri = αi + βmRm + β1R1 + β2R2 + β3R3 + ei
αi denotes return of security i which is independent of the performance of the market
The extra market factors are represented by R1R2R3. β is a constant. It is a measurement of

sensitivity in the stock return (Kilenthong, 2017).
ei denotes residual return.
7. Determination of β
Due to changes in the economy varied security returns can be observed. The cause of varied
security returns in the market is held due to the effect of systematic risk. It means changes in
economy are held due to the presence of systematic risk. Although more or less all securities
response to market changes. The degree of such change depends on the factor of
responsiveness produced by the security to the market changes. The average effect of a
change in the economy can be represented by the change in the stock market index. A
security’s variability can be measured with the variability in the stock market index which is
termed as a systematic risk of a security. β is the statistical measure of the systematic risk. Here
the comparison is required to be made between the historical records of returns and the stock
market index. Two statistical methods are generally used to find out the outcome of β. These
are correlation method and regression method. Correlation coefficient has been presented
earlier.
7.1 Determination of β under Regression Method

The regression model is used to show a linear relationship between dependent variable and
independent variable. In the regression theory we have found two constants. We have already
aware about β. There exists another constant, known as α. The regression formula is laid down
below:
Y = α + βY
Where Y = Dependent variable; X = Independent variable; α and β are two constants.
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The formula used for the calculation of α and β are laid down below:
Figure 7.1: Formula of Two Constants
Figure 7.2: Description of the Variables
In respect of calculating beta(β) the return of the individual security is considered as the
dependent variable and the mark of independent variable is vested on return of the market
index. The regression equation is given as:
Ri = α + βRm
Where, Ri is return on individual security
Rm is return on market index
α denotes estimated return on security when the market is fixed
β signifies the change in the return of individual security relative to one unit change in the return
of the market index.
Beta measures the volatility of a stock with respect to the market. A beta of 1 implies that 10%
change in the market will lead to a 10% change in the stock price. A beta of 1.2 implies that
10% change in the market will lead to a 12 % change in the stock price. A beta of 0.8 implies
that 10% change in the market will lead to a 8 % change in the stock price (Kilenthong, 2017).
8. Capital Asset Pricing Model

There exists a relationship between expected return and risk of individual securities and
portfolios. The capital asset pricing model (CAPM) is designed to derive such relationship. We
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have already known that portfolio can be made up with n number of securities. As per Markowitz
portfolio theory an efficient frontier curve is a set of combined securities which provide the best
combination of risk return portfolios. The aim of the investor is to choose such frontier.
Variability of returns can be reduced through diversification. Securities found in the efficient
frontier are well diversified. Although diversification does not mean removal of entire risk from
the securities of the portfolios. It is because market risk always prevails in the market which is
considered as a constraint factor in the security or portfolio return. The market risk cannot be
eliminated through diversification. Although degree of risk can be reduced through
diversification but to some extent only. The presence of market risk can be identified by the
sensitivity of a security to the movements of the market. The measurement of such sensitivity
can be measured through beta coefficient of the security. Investor expects that return on
securities should have some compatibility with corresponding risk of the securities. It means
higher the risk higher would be the return expected from it. It has already been told that market
risk cannot be diversified so the return is expected to be correlated with this nature of risk. The
role of CAPM is to provide the relationship between return on security corresponding with
market risk. The CAPM is based on certain assumptions (Investing answers, 2019).
These are given below:
Assumptions:
1. Markets are ideal and there exists no transaction costs, taxes, inflation and other market
related factors
2. Risk aversion nature of the investor
3. Highly efficient market where all the investors having equal right to go through
information
4. All investors are entitled to borrow or lend unlimited amounts under risk free rate.
5. Beta coefficient is the only measure of risk
6. All assets are absolutely liquid and infinitely divided
7. The amount of available assets is fixed during a given period of time
8. State of market equilibrium. All investors are price takers.
9. Return of all available assets is subject to normal distribution function.
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Formula of CAPM is given below:

Figure 8.1: CAPM Formula
(Financial Management Pro, 2019)
Figure 8.2: Efficient Frontier
(ACCA, 2019)
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The CAPM is used to calculate expected rate of return for any risky asset. One can easily
measure the beta by running a straight-line statistical regression on data points. Such
measurement shows price changes of a market index relative to price changes to risky assets.
Although beta can be different as it is collected from different time frame. A five-year data
collection record should be dissimilar with five-month data collection time frame. Anyhow, as it is
already stated that CAPM is used as a minimum rate of return for any invested project in order
to discount the future cash flows arrived from such invested project so the fair price of an
investment can be determined.
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References
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[Accessed 21 10 2019].
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Financial Markets and Investments

Module Risk and Risk Aversion

FM&I/M2SII/v1.0/301019 Risk and Risk Aversion | Session No.

1. Portfolio Analysis ...................................................................................................... 5

2. Expected Return of a Portfolio ................................................................................. 6

2.1. Expected Return of a Portfolio .............................................................................. 6

2.2. Risk of a Portfolio .................................................................................................. 6

3. Risk Diversification ................................................................................................. 10

4.1. Selection of Optimal Portfolio .............................................................................. 12

4.2. Markowitz’s Technique to identify Efficient Portfolio ........................................... 14

4.3. Limitations of Markowitz Model ........................................................................... 14

4.3.1. Large Number of Input Data .....................................................................................14

4.3.2. Complexity ...............................................................................................................14

5. Single Index Model .................................................................................................. 15

6. Multi Index Model .................................................................................................... 15

7.1 Determination of β under Regression Method ..................................................... 16

8. Capital Asset Pricing Model ................................................................................... 17

FM&I/M2SII/v1.0/301019 Risk and Risk Aversion | Session No.

Figure 2.1: Expected Return of a Portfolio.................................................................................. 6

Figure 2.2: Covariance Formula ................................................................................................. 7

Figure 2.3: Coefficient of Correlation .......................................................................................... 7

Figure 2.5: Regression Formula ................................................................................................10

Figure 3.1: Graphical presentation of Risk Diversification .........................................................10

Figure 4.1: Graphical presentation of Efficient Frontier..............................................................12

Figure 4.2. Portfolio Selection ...................................................................................................13

Figure 5.1: Single Index Model ..................................................................................................15

Figure 7.1: Formula of Two Constants ......................................................................................17

Figure 7.2: Description of the Variables ....................................................................................17

Figure 8.1: CAPM Formula........................................................................................................19

FM&I/M2SII/v1.0/301019 Risk and Risk Aversion | Session No.

FM&I/M2SII/v1.0/301019 Risk and Risk Aversion | Session No.

2. Expected Return of a Portfolio

2.1. Expected Return of a Portfolio

Expected return will be:

Figure 2.1: Expected Return of a Portfolio

2.2. Risk of a Portfolio

FM&I/M2SII/v1.0/301019 Risk and Risk Aversion | Session No.

The covariance formula can be shown in the following manner:

Figure 2.2: Covariance Formula

Where CovAB = Covariance between A and B

ṜA = Mean return of security A

ṜB = Mean return of security B

The formula of Coefficient of Correlation is:

Figure 2.3: Coefficient of Correlation

FM&I/M2SII/v1.0/301019 Risk and Risk Aversion | Session No.

Cov xy = Covariance between x and y

Figure 2.4: Variance of a Portfolio

W1 = Proportion of funds invested in the first security

W2 = Proportion of funds invested in the second security

σ12 = variance of first security

σ22 = variance of second security

FM&I/M2SII/v1.0/301019 Risk and Risk Aversion | Session No.

Correlation coefficient can be determined in the following manner:

FM&I/M2SII/v1.0/301019 Risk and Risk Aversion | Session No.

Or alternatively Rxy can be determined in the following manner:

Figure 2.5: Regression Formula

(Investment Cache, 2019)

Figure 3.1: Graphical presentation of Risk Diversification

FM&I/M2SII/v1.0/301019 Risk and Risk Aversion | Session No.

The above stated criteria are based on the following assumptions:

FM&I/M2SII/v1.0/301019 Risk and Risk Aversion | Session No.

Figure 4.1: Graphical presentation of Efficient Frontier

4.1. Selection of Optimal Portfolio