Optimal Risky Portfolios

P.V. V ISWA NAT H

F OR A F IRST COURSE IN INV ESTM ENTS

2

Learning Goals

How does diversification help in constructing optimal risky portfolios?

How do we construct the opportunity set when there are two risky assets available?

How do we compute the minimum variance portfolio and the optimal portfolio when there are only two risky assets and no other assets?

How do we compute the optimal portfolio when there are two risky assets and a risk-free asset?

The Efficient Portfolio of Risky AssetsThe Separation PropertyThe importance of covariance in diversification