I.A.1.6.3 Applications of the Mean-Variance Criterion

Question 1

Mean-Variance Analysis

Answer 1

any risk-reward analysis based only on mean and variane but not necessarily applyin gthe mean-variance criterion

Question 2

:Mean-variance applications

Answer 2

Portfolio selection, capital budgeting, optimal hadging, optimal consumption and insurance decisions

Question 3

Mean- Variance Criterion

Answer 3

• Useful simplification of the maximum EU when the outcomes under consideration do not exceed plus or minu one coefficient of risk tolerance
• Good approximate when analysing bigger gambles with special classes of utility functions and/or distributions of outcomes
• simplifies a number of optimisation problems where risk must be balanced against returns, compared to the maximum EU

Question 4

Expectation-VAriance (EV Criteria)

Answer 4

• more complex, non-linear functions of expectation and variance based on other measures of rewards and risks
• Alternative to the mean-variance criterion ( attempts to adjust for deviations away from the maximum EU that can occure when using the mean-variance criterion)