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Chapter 7: Portfolio Theory
Learning objectives
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This chapter should enable the reader to understand, describe and explain in a formal way the interactions between investments and the risk-reducing properties of portfolios. This includes:
- calculating two-asset portfolio expected returns and standard deviations;
- estimating measures of the extent of interaction - covariance and correlation coefficients;
- being able to describe dominance, identify efficient portfolios and then apply utility theory to obtain optimum portfolios;
- recognise the properties of the multi-asset portfolio set and demonstrate the theory behind the capital market line.
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