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what is risk adverse

to dislike risk and require compensation to assume additional risk


what is efficient portfolios

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


what is minimum variance frontier

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


what is attainable portfolios

portfolios that may be constructed by combing the underlying securities


what is minimum variance portfolio MVP

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


what is efficient frontier

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


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

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


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

Harry Markowitz


What did Harry Markowitz assume in his work on portfolio theory

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


the blue line represents what

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


read slide 25 and 26

read it


what is diversification

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


what is random diversification also called

naïve diversification


what is random diversification

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


read domestic diversifaciton

and add notes pg 314


what is unique (non-systematic ) risk also called

diversifiable risk


what is unique (non systematic ) or diversifiable risk

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


what is market (systematic) risk also called

non-diversifiable risk


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

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