Topic 7: Portfolio selection

Question 1

Efficient portfolio

Answer 1

portfolio with the highest expected return for a certain level of risk

Question 2

Minimum risk portfolio

Answer 2

portfolio with the lowest possible risk for a given return

Question 3

The Markowitz Model (& its assumptions)

Answer 3

• Aim: to determine either the efficient set of portfolios (efficient frontier) or the set of minimum risk portfolios (opportunity set)

Assumptions:
1. The return on securities follows a subjective stochastic variable and its expected value represents the expected value of the return
2. Risk is measured by the variance of that variable
3. Investors are supposed to act rationally

Question 4

Sharpe’s index

Answer 4

it computes the average portfolio excess return per unit of risk

the higher the index the better combination achieved