The Efficient Frontier Flashcards
which part of the efficient frontier is most important to us - top or bottom
top
because these are the ones with higher return
we can ignore the bottom half as we endure the same risk but do not get the same return
can you achieve any higher risk and return combinations than the efficient frontier
no
does diversification get rid of all risk
no
with diversification, risk eventually levels off, why is this
non diversifiable risk - common to all firms in an economy
what is market risk also known as
systematic
non diversifiable
what is firm specific risk also known as
unique
diversifiable
non systematic
example of unique risk
glass found in a product and it has to be recalled
example of market risk
energy prices
inflation levels
can risk be positive
yes
example of positive risk
new CEO makes great changes
ways to diversify
asset classes (bonds, equities, cash, real estate)
industries (oil, tech, pharmaceuticals)
currencies
countries (different political cycles)
an example of why diversifying between industries is good
covid
airlines did bad
zoom amazon etc did good
what are some arguments against geographical diversification
did the world become smaller with globalisation
are industry effects now more important to consider than country effects
does diversification work
in the long run yes
