The aim of these simulations is to understand the mean-variance optimization and mathematical risk price equilibrium if all investors use this rule with common sets of information. A simulation focuses on five to 10 years of monthly returns in the sector who are initially drawn from a normal multivariate distribution known. The mean-variance optimization is designed to produce the maximum return portfolio portfolio excess relative standard deviation (ie, the highest Sharpe ratio) in this context. Simulation B change the settings to allow students to determine the expected sales income of simultaneous auctions. We still agree on the covariance matrix, and implicitly expected profits but allow students to set market prices. The average weight of the portfolio in the 10 sectors is calculated and used as a weight vector of market capitalization. With these market weight (w) and the covariance matrix given the Capital Asset Pricing Model (CAPM) implied expected returns for each sector are calculated and compared with all students expected to change.
by
Erik Stafford,
Joshua D Coval
Rodrigo Osmo
Zack Page
John Jernigan,
Paulo Passoni
3 pages.
Date Posted: November 15, 2007. Prod #: 208086-PDF-ENG
Asset Allocation Solution Case I
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