Applications in Finance

  • Wolfgang Härdle
  • Léopold Simar

Abstract

A portfolio is a linear combination of assets. Each asset contributes with a weight c j , to the portfolio. The performance of such a portfolio is a function of the various returns of the assets and of the weights c = (c 1,, c p )T. In this chapter we investigate the “optimal choice” of the portfolio weights c. The optimality criterion is the mean-variance efficiency of the portfolio. Usually investors are risk-averse, therefore, we can define a mean-variance efficient portfolio to be a portfolio that has a minimal variance for a given desired mean return. Equivalently, we could try to optimize the weights for the portfolios with maximal mean return for a given variance (risk structure). We develop this methodology in the situations of (non)existence of riskless assets and discuss relations with the Capital Assets Pricing Model (CAPM).

Keywords

Covariance Volatility PanAm 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2003

Authors and Affiliations

  • Wolfgang Härdle
    • 1
  • Léopold Simar
    • 2
  1. 1.CASE — Center for Applied Statistics and Economics, Institut für Statistik und ÖkonometrieHumboldt-Universität zu BerlinBerlinGermany
  2. 2.Inst. StatistiqueUniversité Catholique LouvainLouvain-la-NeuveBelgium

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