SFM

Question 1

What is the 2 drawbacks from the Markowitz Procedure ? ( Finding the maximum Return Portifolio on the Cal ( not the tangency point )

Answer 1

• Costly: Needs many VAR and COV Matrixes ( If you have 100 stocks ) VERY DATA heavy.
• Inputs are mutually Inconsitent: Past returns are unrealible to estimate expected future returns, hard to see what is a good correlation and estimate variances as well.

Question 2

Why the Single Index Models looks at Excess Returns (Ri) insetad of total returns(ri)

Answer 2

Because we care to see if the Return on the Market is above or below the risk free