Chapter 8 efficency frontier

Question 1

what is risk adverse

Answer 1

to dislike risk and require compensation to assume additional risk

Question 2

what is efficient portfolios

Answer 2

those portfolios that offer the highest expected return for a given level of risk or offer the lowest risk for a given expected return

Question 3

what is minimum variance frontier

Answer 3

the curve produced when determining the expected return-risk combinations available to investors form a given set of securities by allowing the portfolio weights to vary

Question 4

what is attainable portfolios

Answer 4

portfolios that may be constructed by combing the underlying securities

Question 5

what is minimum variance portfolio MVP

Answer 5

a portfolio that lies on the efficient frontier and has the minimum amount of portfolio risk available form any possible combination of available securities

Question 6

what is efficient frontier

Answer 6

the set of portfolios that offer the highest expected return for their given level of risk
- the only portfolios that rational, risk averse investors will want to hold

Question 7

the more securities in a portfolio the (risk is what)

Answer 7

• greater the relative impact of the securities co-movements on overall portfolio’s risk and
• the lower the relative impact of the individual risks

Question 8

who was the awarded the Novel prize for their work on Portfolio theory

Answer 8

Harry Markowitz

Question 9

What did Harry Markowitz assume in his work on portfolio theory

Answer 9

1. investors are rational decision makers
2. investors are risk averse (and must be compensated for assuming additional risk)
3. investor preferences are based on portfolio expected return and risk as measured by variance and SD

Question 10

the blue line represents what

Answer 10

the minimum variance frontier, the risk-return combinations available to investors from a given set of securities by allowing portfolio weights to vary

Question 11

read slide 25 and 26

Answer 11

read it

Question 12

what is diversification

Answer 12

the process of investing funds across several securites, wich results in reduced risk

Question 13

what is random diversification also called

Answer 13

naïve diversification

Question 14

what is random diversification

Answer 14

the act of randomly buying securities without regard to relevant investment characteristics, such as company size, industry classification and so on

Question 15

read domestic diversifaciton

Answer 15

and add notes pg 314

Question 16

what is unique (non-systematic ) risk also called

Answer 16

diversifiable risk

Question 17

what is unique (non systematic ) or diversifiable risk

Answer 17

the company specific part of total risk that is eliminated by diversification

Question 18

what is market (systematic) risk also called

Answer 18

non-diversifiable risk

Question 19

what is market (systematic) risk or non-diversified risk

Answer 19

the systematic part of total risk, directly influenced by overall movements in the general market or economy, that cannot be eliminated by diversification