The Lagniappe Fund (ILAP)

Physical Concepts Examined:
1. Portfolio optimization
2. Capital asset pricing model

Table of Contents:

SETTING THE SCENE

THE BUSINESS OF MANAGING MONEY

RISK AND RETURN: ECONOMIC, MATHEMATICAL, AND EMPIRICAL VIEWS
Requirements 1-3

THE STRATEGY OF DIVERSIFICATION: THE IMPACT OF CORRELATION AND COVARIANCE
Building Blocks of Portfolio Theory
Diversification with perfect negative correlation
Diversification with perfect positive correlation
Summary
The Case of Multiple Securities
Diversifiable and Nondiversifiable Risk
The Role of the Risk-Free Security
Requirements 4-8

MEAN-VARIANCE EFFICIENCY AND ASSET ALLOCATION
Risk-Aversion and the Mean-Variance Framework
Asset Allocation
Market Equilibrium
Requirements 9-12

LESSONS FOR THE PORTFOLIO MANAGER
Requirements 13-15

REFERENCES

APPENDIX: MATHEMATICAL BACKGROUND
Matrices and Vectors
Concepts from Probability
Estimating Parameters
Applications of Lagrange Multipliers

SOLUTIONS TO REQUIREMENTS

NOTES FOR THE INSTRUCTOR

ACKNOWLEDGMENTS

ABOUT THE AUTHORS