Introduction to Finance: Risk and Return in Portfolios

This lecture introduces the historical tradeoff between risk and return in large portfolios, discussing the concept of portfolio weights and historical excess returns. It covers the calculation of portfolio returns, expected portfolio returns, and the benefits of diversification in reducing risk. Examples illustrate the impact of correlation on portfolio risk and the importance of combining stocks to eliminate firm-specific risks. The lecture also explores the effects of short sales on portfolio volatility and the efficient frontier with multiple assets, including the identification of the tangent portfolio. Finally, it discusses the Sharpe ratio as a measure of reward-to-volatility and the role of risk-free assets in portfolio optimization.