Chapter 5 Flashcards
1
Q
What does it mean when a portfolio is lying on the efficient frontier?
A
portfolios lying on the efficient frontier are the best investors can get to maximise their risk/adjusted returns.
2
Q
What are the portfolios inside the efficient frontier like? (2)
A
- inefficient
- those on the line will dominate portfolios inside the line
3
Q
What does it mean when a portfolio is outside the efficient frontier (3)
A
- a value-based opportunity
- will be bought quickly
- demand will increase the price of the asset
4
Q
Can diversification eliminate non-systematic risk? And explain
A
no. there is a diminishing effect on how much risk is reduced
5
Q
On average how many securities do you need to get the benefits of diversification?
A
25 - 30 seperate equities with low correlation
6
Q
What is the equation for total risk?
A
total risk = systematic risk + unsystematic risk
7
Q
assumptions of CAPM (3)
A
- investors are rational and risk-averse
- investors are driven towards diversification
- securities are fairly priced
8
Q
Limitations of CAPM (4)
A
- Single-period (one year) model
- only applicable to diversified portfolios
- Difficult to estimate beta
- Limitations of the ‘efficient frontier’ concept
