Question
In a two asset porfolio, I have the following equations: (1) E(Rp) = w1 E(R1) + w2 E(R2) (2) Sigma(Rp) < w1 Sigma(R1) + w2
In a two asset porfolio, I have the following equations:
(1) E(Rp) = w1 E(R1) + w2 E(R2)
(2) Sigma(Rp) < w1 Sigma(R1) + w2 Sigma(R2) unless R1 and R2 has a correlation of +1.
(3) Beta(Rp) = w1 Beta(R1) + w2 Beta(R2)
What are the economic meanings behind these equations? Why is the sigma of P smaller than the weighted average of the sigmas of the two assets? Why is the beta of P equal to the weighted average of the betas of the two assets?
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Equity Valuation Risk And Investment A Practitioners Roadmap
Authors: Peter C. Stimes
1st Edition
0470226404, 9780470226407
