Portfolio Theory

Question 1

A portfolio’s return depends on the

Answer 1

expected return on the assets in the portfolio and their weights in the portfolio

Question 2

A portfolio’s risk depends

Answer 2

the risk of the assets in the portfolio, their weights in the portfolio and the relationship between the assets in the portfolio.

Question 3

An asset’s risk can be measured by

Answer 3

its variance

Question 4

the investment opportunity set

Answer 4

is the set of all available risk- return combinations at different weight combinations

Question 5

The efficient frontier

Answer 5

the set of portfolios that have the highest return for a level of risk, or the lowest risk for a level of return.

Question 6

what will impact a portfolios variance most?

Answer 6

changes in covariance, compared to change in weight or asset risk

Question 7

utility functions

Answer 7

represent risk/return preferences. We will work with quadratic utility. this is used in the CAPM