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CFA Level 1 Reading 53CFA Level 1 Reading 53!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~
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CFA Level 1 Reading 53!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~&&&&&&&&#
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CFA Level 1 Reading 53CFA Level 1 Reading 53!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~
Terms in this set (43)
Portfolio Standard Deviation with a Risk Free Asset
When calculating the the variance we are going to go through the formula for portfolio
variance but since the correlation and standard deviation of a risk free asset is 0 we are
going to have a many variable cancel out.
Portfolio Standard Deviation with a Risk Free Asset (Formula)
Var = √w^2σ^2 + w^2σ^2 + 2wwσσCorr or
Var = √w^2σ^2 + w^2(0)^2 + 2wwσ(0)(0) or
Var = √w^2σ^2
Var = wσ
Combining Risk Free with Risky Asset
When plotting this on a graph, the risk-free acts as b in y = mx + b because with E(x) on
the y axis, the risk-free asset only adds return with no risk. The line of possible risk and
returns is then only given by the risky asset giving you the capital allocation line.
Market Portfolio
When everyone has the same expectations of what the return to risk will be so everyone
has the same mix of risky assets.
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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~&&&&&&&&##########################
CFA Level 1 Reading 53!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~&&&&&&&&#
!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~&&&&&&&&############################@@@@@@
CFA Level 1 Reading 53CFA Level 1 Reading 53!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~
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Students
also
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~~~&&&&&&&&############################@@@@@@@@@@@@@@@@22/2026//2027
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~&&&&&&&&##########################
CFA Level 1 Reading 53!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~&&&&&&&&#
,~~~&&&&&&&&############################@@@@@@@@@@@@@@@@22/2026//2027
!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~&&&&&&&&############################@@@@@@
CFA Level 1 Reading 53CFA Level 1 Reading 53!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~
Terms in this set (43)
Portfolio Standard Deviation with a Risk Free Asset
When calculating the the variance we are going to go through the formula for portfolio
variance but since the correlation and standard deviation of a risk free asset is 0 we are
going to have a many variable cancel out.
Portfolio Standard Deviation with a Risk Free Asset (Formula)
Var = √w^2σ^2 + w^2σ^2 + 2wwσσCorr or
Var = √w^2σ^2 + w^2(0)^2 + 2wwσ(0)(0) or
Var = √w^2σ^2
Var = wσ
Combining Risk Free with Risky Asset
When plotting this on a graph, the risk-free acts as b in y = mx + b because with E(x) on
the y axis, the risk-free asset only adds return with no risk. The line of possible risk and
returns is then only given by the risky asset giving you the capital allocation line.
Market Portfolio
When everyone has the same expectations of what the return to risk will be so everyone
has the same mix of risky assets.
~~~&&&&&&&&############################@@@@@@@@@@@@@@@@22/2026//2027
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~&&&&&&&&##########################
CFA Level 1 Reading 53!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~&&&&&&&&#
