Chapter 8 efficency frontier Flashcards
(19 cards)
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
- investors are rational decision makers
- investors are risk averse (and must be compensated for assuming additional risk)
- 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
