Risk Return Relationship

Mean Variance Utility

[pic 1], portfolio with higher utility has a more attractive risk return profile. A>0 measures risk aversion, If A=0 investor is risk-neutral, utility score of risky portfolio is a certainty equivalent rate of return

Risk Return Relationship           Capital Allocation Line                    Minimum Variance Efficient Portfolio                               Minimum Variance Portfolio[pic 2]

    [pic 3][pic 4][pic 5]

[pic 6]

[pic 7]

Risk Reduction in Equally Weighted Portfolio                                                                       [pic 8]

[pic 9]                                                     [pic 10][pic 11][pic 12][pic 13][pic 14]

Fama-French Three Factors                         Size and Value Anomalies                 Efficient Market Hypothesis[pic 15][pic 16]

[pic 17]

[pic 18]

[pic 19]

Momentum

1993 Article – Jegadeesh and Titman, purchasing and holding for 6 months stocks based on prior 6 month returns results in excess returns of 12% per year on average (negative coefficient means loser while positive coefficient means winner)