Mean-Variance Analysis:  Risk vs. Expected Return

Mean-Variance Analysis quantifies the notions of risk and expected return by applying concepts from statistics.  The values of assets are taken to be random variables with various expected values

Model Link:  Mean-Variance Analysis:  Risk vs. Expected Return
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Printable PDF Exercises

This application studies the case with one risky asset and one risk-free asset. The goal is to provide intuitive answers to three questions.

  • How do agents arrive at their optimal portfolio?
  • Why do different people will have different optimal portfolios?
  • Why, even after they reach their optimal portfolio, do agents continue to trade?

The analysis is conducted within the framework of a diagram of risk vs. expected return.