Week 2
Portfolio Theory
Markowitz mean-variance optimization: diversification, the efficient frontier, the Sharpe ratio, and the tangency portfolio — the theory you will put to work in PC Lab 1.
Week 2 materials
What we cover
Modern portfolio theory, from the ground up:
- Expected return and volatility of a portfolio; why diversification works
- The mean-variance framework and the efficient frontier
- The Sharpe ratio as a measure of risk-adjusted performance
- The tangency portfolio: the best risky portfolio when a risk-free asset exists
Put it to work
This week’s lecture is the theoretical backbone of PC Lab 1 — Applied Portfolio Theory, where you will build and test a tangency portfolio on real stock market data.