8.1 Modern Portfolio Theory Flashcards
Portfolio Theory:
The optimal portfolio for an investor depends upon the investor’s ability to assume risk.
The optimal portfolio has the lowest risk for a given level of return.
The optimal portfolio offers the highest return for a given level of risk
An investor selects an appropriate portfolio by choosing the portfolio:
The answer is at the point of tangency between the indifference curve and the efficient frontier. The investor will choose a portfolio represented by the highest point attainable on the indifference curve.
Calculating the measure of risk that is used in Markowitz’s efficient frontier?
The efficient frontier consists of efficient portfolios. An efficient portfolio has the highest return for a given level of risk.
The risk measure is standard deviation; specifically, the standard deviation of a multi-asset portfolio.
Beta is not used in the calculation.
If information is generated randomly and information announcements are independent:
If information is generated randomly and information announcements are independent, prices will tend to fully reflect all available information. In addition, price changes will be independent of one another and tend to occur random patterns.
