Econ 185 -- Spring 2005

Consider three assets and the means, variances, and standard deviationa of their returns.

While the variance is a measure of risk, we can also compute the utility-based value of the risk.

The Central Limit Theorem is a fundamental tool in mean-variance analysis.

Rules for linear combinations of assets are also important.

For example, we can analyze a portfolio of two stocks.

Question, what kind of covariance is best for reducing risk?