Portfolio Theory

Diversification reduce risk. Thw standard deviation of portfolio is always less then the average standard deviation of individual stocks in theportfolio.

In diversified portfolio , covariances among stocks are more important than individual variances Only sysstematic risk matters.

Investors should try to hold portfolios on the efficient frontier. These portfolio maximize expected return for a given level of risk.

With a riskless asset, all investors should hold the tangency portfolio. Ths portfolio maximixes the trade-off between risk and expected return.

Assets are srquences of cash flows

Data-t cash flows arwdifferant from date -(t+k) cash flows.

Use "exchange-rates" to convert one type of cash flow into another.

PV and FV related by "exchange rates"

Exchange rates are deermined by supply/demand

Opportunity cost of capital: expected return on ewuivalent investments in financial market.

For NPV calculations, visualize cashflows first.

Decision rule: accept positive NPV project, reject negative ones.

Special cashflows: perpetuities and annuities

Compounding

Inflation

Extensions and Qualifications