Summary Class 10Portfolio-2 class notes and presentation

ECO204
Financial Portfolios 2
Part 1: A Portfolio Consisting of a Risk-F
Asset and Several Risky Assets
Ajaz Hussain, Economics, University of Toronto (STG)

,PDF-Chapters




Financial Portfolios Chapter (recommended as supplementary m
https://www.economics.utoronto.ca/ahussain/204/2020Chapters
CO_204_2018-2019_Finance-1.pdf

,“Target” (Lectures) Portfolio
Investor with Mean-Variance Utility Function invests $" of her own funds in a
one-month forward financial portfolio with:

Fraction (1 − &) of her funds Fraction & of her funds invested in a “Synthetic Ris
invested in a Risk Free Asset (SRA)” consisting of ' ≥ 1 risky assets:

Fraction )! of Fractio
“SRA” funds in … “SRA”
Risky Asset 1 Risky A


“Returns” refers to “Rate of Returns” (!!"#,! )

Lecture Portfolio will estimate future ”returns” and “risk” by historical average returns & historical st
deviation of returns

In Project 2, you will estimate estimate future ”returns” and “risk” by (1) historical average returns & h
standard deviation of returns (2) “Shrinkage” (3) Wiener and Ito Stochastic Processes

, Constructing Lecture Target Portfolio
“3 Step” Process to Portfolio “A”

Construct Target Portfolio Agent invests $" of her own funds in a financial portfolio cons



Fraction (1 − &) invested in a Risk Free Asset Fraction & invested in O



Portfolio A Portfolio “B”

A “Synthetic Risky Asset” consisting of ' ≥ 1 actual risky a




Portfolio B Fraction )! of “SRA” in
Risky Asset 1
… Fra




Portfolio “C”

Agent invests $" of her own funds in a financial portfolio consis

Fraction (1 − &) invested in a Risk Free Fraction & invested in a “SRA
Asset 1 actual risky a
Fraction )! of
“SRA” in Risky …
Target Portfolio Asset 1


(Portfolio C)