MPT AND CAPM

Question 2

what is Efficient frontier

Question 3

what is the portfolio risk formula

Question 4

what is mean and variance in portfolio risk

Answer 4

mean- return
variance- risk

Question 5

in mpt the correlation should be +1 or -1

Answer 5

-1 but its not possible but it should be less than 1 so that MPT is diversified

Question 6

if the correlation is +1 the risk of portfoli is ?

Answer 6

then the risk of portfolio is at the highest measured by weight a sq* variance a + weight b sq* variance b

Question 7

if the correlation is -1 then the risk of portfolio?

Answer 7

the the risk of portfolio is at minimum measured by weight a square * variance a - weight b sq* variance b

Question 8

assumption of mpt?

Question 9

What global minimum variance in portfolio

Answer 9

global minimum variance is a point where the return is high and risk is less than the inefficient frontier

Question 10

what happen after the efficient frontier? is there any portfolio there?

Answer 10

the portions beyond efficient frontier is unattainable and we should not invest in that

Question 11

explain everything related to correlation in mpt

Answer 11

correlation should be -1 or less than 1 because that way the portfolio is diversified and if the assest 1 is going down then the asset 2 return can minimise the loss… but if its 1 then the movement are together is asset 1 is going down then asset 2 will also go down which is not desirable

Question 12

in mpt who are rational investors?

Answer 12

rational investors are those who want to increase their mean return and low their variance

Question 13

in mpt the return are normally distributed which means?

Answer 13

means skewness is 0 and kurtosis is 3 and we only focus on mean and variance of the return. we want mean return high and variance low

Question 14

what is role of covariance in mpt ?

Answer 14

covariance (a,b) = correlation * sd a * sd b and if the correlation is less than 1 then i am happy

Question 15

what is role of covariance in mpt ?

Answer 15

covariance (a,b) = correlation * sd a * sd b and if the correlation is less than 1 then i am happy

Question 16

can correlation be 0 in mpt?

Answer 16

yes, if the correlation is 0 then the asset a and b are not correlated and we calculate risk of of the portfolio on the basis of weight and variance

Question 17

why do we need New theory other than mpt ?

Answer 17

because mpt only involves risky asssets and no risk free asset

Question 18

what is theory behind ic curve and utility in mpt?