1059 WordsNov 16, 20105 Pages

The definition of the efficient frontier says that “the efficient frontier represents the set of portfolios that has the maximum rate of return for every given level of risk, or the minimum risk for every level of return.” I plotted standard deviation on x axes and Returns on y axes to interpret efficient frontier. Exhibits also include these and the graphs you asked for as graph2:
In our study, we concentrated on the optimal portfolios, the one which has the lowest volatility or risk, for given level of return. The area below the frontier shows the achievable risk-return combinations, there will be at least one portfolio constructible that has the risk and return corresponding to that point. No portfolio on the efficient frontier can*…show more content…*

As seen in table below.
STD EX® NAME EX®)/STD
4.560897 -0.07629 WMT -0.01673
6.62584 0.4643 HD 0.070074
4.832779 0.618 C 0.127877
4.519264 0.705732 HSY 0.156161
7.630042 0.805847 MRK 0.105615
5.243063 0.836464 IBM 0.159537
2.851834 0.867592 EQUAL 0.304222
10.58777 2.719098 BBY 0.256815
As seen in exhibit 11 if we add MCD to our portfolio and solve for without short selling we can see that the efficient frontier moved to the left. In other words it improved. This is due to diversification. By the same intuition, as seen in exhibit 12, if we add LMT to our portfolio efficient frontier improved even further. To see the difference, we can check exhibit 12.The reason that adding LMT improved efficient frontier even further is because of the fact that while MCD has positive correlation as seen in the correlation matrix ,in exhibit 1 whereas LMT is negatively correlated leading to more reduction in the risk of the portfolio due to diversification. Due to the point where the curves intersect (the point when expected return is between 1.5 and 1.75) the portfolios including LMT are more efficient until expected return is 1.75 whereas after the point the portfolios with MCD become more efficient if expected return is equal to higher than 1.75.This may be due to the marginal diminishing returns that reverse the marginal utility the portfolio gains by increasing expected return. Up to that point if we divide the expected

Related

## Mean Variance Analysis

713 Words | 3 Pages“Modern Portfolio theory”, developed the mean-variance analysis, which focuses on creating portfolios of assets that minimizes the variance of returns i.e. risk, given a level of desired return, or maximizes the returns given a level of risk tolerance. This theory aids the process of portfolio construction by providing a quantitative take on it. It integrates the field of quantitative analysis with portfolio management. Mean variance analysis has found wide applications both inside and outside financial

## The Production Possibilities Frontier

1083 Words | 4 Pagespossibilities frontier will move outward, and the economy will move closer to the production possibilities frontier. Both outcomes are related. Freer trade creates more markets for the country for its goods and services. This allows companies to produce more, but it does not directly change the production capacity of the nation. Thus, the economy moves closer to the production possibilities frontier (Rittenberg & Tregarthen, 2009). The reason that the production possibilities frontier also moves

## Frontier Printers Case Essay

1531 Words | 7 PagesProblem Statement Frontier Printers is lacking strategic human resource objectives that are necessary to address the organizational growth and incorporate changing technological trends. As a result they are at risk of not being able to attract/retain valuable employees and could face potential legal litigation. Critical Facts Frontier Printers is a small-family business and has seen a 50% growth in the number of employees in the last three years. The departure of the press operator and the driver

## Portfolio Management Fin 550 Essay

1675 Words | 7 Pagesdiverse from each other. They can also be used to maximize risk and minimize profit. According to the article titled “portfolio diversification” the very best mix of assets you can hold to maximize risk for a given level of return is called the efficient frontier. (Portfolio diversification 2009). In other words if one has a diverse mix of assets they are more likely to maximize their risk and maximize their profit. Therefore having a diverse portfolio with stocks, bonds, real estate, global funds and

## Partners Healthcare Case Aanlysis Essay examples

1254 Words | 6 Pagessegment of the LTP. Michael Manning, the deputy treasurer of Partners Healthcare System, was asked to recommend the size and the composition for the real-asset portfolio contributed to the $2.4 billion long-term pool (LTP) in the Partners. Facts and Analysis Due to the fact that different Partners Healthcare hospitals might have different acceptable risk levels for their investment portfolio then the most reasonable solution would be to invest both in risk-free STP and risky LTP. By choosing different

## The Roles of Risk Free Rate

1020 Words | 4 PagesThe role of risk-free rate in the financial analysis is of vital importance because it allows the cost of both equity and total capital to be assessed. For a particular security to be characterized as risk-free, the actual returns should always be equal to the expected one. The aforementioned fact presupposes the satisfaction of two criteria: The first indicates that the stock is free of default risk and the second declares that there can be no reinvestment risk (Damodaran 1998). However, no security

## Benefits Of The Financial Services Industry Outweigh The Disadvantages

1396 Words | 6 Pagesinstead of concentrating on a specific financial product. Portfolio analysis was created by the Nobel laureate Harry Markowitz in the 1950s, which is a mathematical algorithm at first. This theory requires three statistics: 1. The expected rate of return, , for each investment. 2. The standard deviation of the returns, , for each investment. 3. The correlation coefficients, , between all pairs of investment. Markowitz portfolio analysis takes these statistics into consideration to decide which candidates

## Portfolio Theory As An Investment Decision Instrument

1697 Words | 7 Pagesdecisions relative too the assumptions of the Portfolio Theory. The paper is summarized to give packed perspective of the discussion upon conclusions were drawn while referencing cited writings. Investment Decisions: Portfolio Theory This is an analysis of the Portfolio Theory as an investment decision instrument. In the investment world, there exist different intentions for investment. The most well known is to earn a return on investment. In any case, selecting investments on the basis of returns

## Essay on Portfolio Analysis and Investment

988 Words | 4 PagesPortfolio Analysis and Investment This assignment is concerned with your understanding of the key issues relative to portfolio analysis and investment. In completing this assignment you are to limit your scope to the US stock markets only. Use the Cybrary, the Internet, and course resources to write a 2-page essay which you will use with new clients of your financial planning business which addresses the following issues and/or practices: ? How individual investors make investment decisions

## Yale Case Solution - Investment Management

1027 Words | 5 Pagesopportunities through less efficient markets. As mentioned in the case (p.4), the gap between 25th and 75th percentile is bigger in less liquid assets such as hedge funds (4.9%), venture capital (12.4%), buyout funds (16%), and real estate (24.8%). This explains why in the recent years Yale invests heavier on private equity, absolute return and real assets. In that respect, the move to less liquid assets is aligned with their philosophy as they see more opportunities in these less efficient markets. Yale’s

### Mean Variance Analysis

713 Words | 3 Pages### The Production Possibilities Frontier

1083 Words | 4 Pages### Frontier Printers Case Essay

1531 Words | 7 Pages### Portfolio Management Fin 550 Essay

1675 Words | 7 Pages### Partners Healthcare Case Aanlysis Essay examples

1254 Words | 6 Pages### The Roles of Risk Free Rate

1020 Words | 4 Pages### Benefits Of The Financial Services Industry Outweigh The Disadvantages

1396 Words | 6 Pages### Portfolio Theory As An Investment Decision Instrument

1697 Words | 7 Pages### Essay on Portfolio Analysis and Investment

988 Words | 4 Pages### Yale Case Solution - Investment Management

1027 Words | 5 Pages