Комментарии:
How come truly diversified portfolio have a correlation of 1?
Isn't the point of diversification to reduce the correlation/
Thank you so much for this valuable video, I wonder if it is possible to get the spreadsheet model.
ОтветитьThank you! Is there provided excel example?
ОтветитьHow is it possible for a maximally diversified portfolio, i.e., with correlation = 1, to not actually BE the market portfolio?? What would be an example of this?
ОтветитьExcellent sus videos. Thank you.
ОтветитьHi, your videos are very lively and interesting, and I am looking forward to working with you. How can I contact you?
ОтветитьI've got an exam coming up tomorrow on exactly this topic. Thanks for the great explanation! Definitely helped more than the professor's explanation
ОтветитьIf you watch to the end, you will see the mapping. Where ER(M) is the market's excess return, and because β(p, M) = σ(M)*σ(P)*ρ(p,M)/σ^2(M) , we can express the SML->CAPM as given by E(r) = Rf + [ER(M)*/σ(M)] * σ(p)*ρ(p,M) . Portfolios on the most-efficient (straight line) CML are special cases of this SML where ρ(p,M) = 1.0; i.e., truly well-diversified portfolios. Any single point (portfolio) on the SML maps to multiple points (portfolios) on the left-hand μ-versus-σ space. Equivalently, multiple points on the same horizontal line in the CML space map to the same single point on the SML line, but among them only the CML point has a perfect ρ(p,M) = 1.0 which is the meaning, in this context, of well-diversified. Hence the meaning of my title: the SML includes the most-efficient CML (as a specific case) but generalizes to inefficient portfolios as well.
We can quantify the implied correlation-volatility tradeoff , in my example (I am rounding now), at 150% leverage: on the CML where ρ(p,M) = 1.0 per CML the E(r) = Rf + [ER(M)*/σ(M)] * σ(p) = 6.0% + (6.59%/11.68%) * 17.51% = 15.89%. The less efficient portfolio has a ρ'(p',M) = 0.89 with implied volatility of 17.51%/0.89 = 19.68%. That's the tradeoff: lower correlation --> higher volatility. It has the same beta of 1.50 and therefore the same E(r) under the SML. Further, we can reverse out its implied specific risk which is given by SQRT(19.68%^2 - 1.50^2 * 11.68%^2) = 8.98% (rounds to 9.0% in my video). Cool, right?
You were a great resource while I was in university, thank you! I had forgot about this channel, will definitely come back to brush up on some concepts 👍
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