7. Diversification and effective frontier

Question 1

What is efficient frontier ?

Answer 1

The efficient forntier is the set of optimal portfolios that offer the highes expected return for a defined level of risk or the lowest risk for a given level expected return.

Question 2

What is the Sharpe Ratio ?

Answer 2

Share ratio is used to help investors understand the return of an invstment compared to its risk.

The ratio is the average return earned in excess of the risk-free rate per uni of volatitility r total risk.

Question 3

Was ist das Two-fund-separation theory?

Answer 3

Investor zwei Töpfe:

• ein Teil in der risko freien Portofolio und
• der Rest im Tangential Portfolio (optimale Portfolio mit höchsten Sharpe Ratio)

“A theory stating that under conditions in which all investors borrow and lend at the riskless rate, all investors will choose to possess a combination of a riskfree portfolio and the market portfolio.”