Un-Intimidating Portfolio Theory and Statistics

24 Pages Posted: 26 May 2003

See all articles by Tom Arnold

Tom Arnold

University of Richmond - E. Claiborne Robins School of Business

Lance A. Nail

University of Alabama at Birmingham - Department of Finance, Economics, and Quantitative Methods

Date Written: April 25, 2003

Abstract

This paper introduces the necessary statistical background for portfolio theory in an intuitive manner. By using two asset portfolio examples, the financial concept of diversification emerges along with the statistical concepts of covariance and correlation. Further, an algorithm is produced for generating an efficient frontier for a two asset portfolio. When introducing the risk free security as a third asset in the portfolio, a similar algorithm produces the weights for the two risky asset "tangency portfolio" and correspondingly a capital allocation line. By understanding these basic concepts, the student is prepared to take on the challenge of more rigorous multi-asset portfolios.

Keywords: Statistics, Portfolio Theory, Capital Allocation Line, Pedagogy

JEL Classification: G10, G11

Suggested Citation

Arnold, Thomas M. and Nail, Lance A., Un-Intimidating Portfolio Theory and Statistics (April 25, 2003). Available at SSRN: https://ssrn.com/abstract=398801 or http://dx.doi.org/10.2139/ssrn.398801

Thomas M. Arnold (Contact Author)

University of Richmond - E. Claiborne Robins School of Business ( email )

1 Gateway Drive
Richmond, VA 23173
United States
804-287-6399 (Phone)
804-289-8878 (Fax)

Lance A. Nail

University of Alabama at Birmingham - Department of Finance, Economics, and Quantitative Methods ( email )

Birmingham, AL 35294
United States
205-934-8501 (Phone)
205.975.4427 (Fax)

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