Efficient Frontier Analysis

With Reference to this statement, describe, discuss and illustrate the principles of portfolio theory. Your essay should include coverage of the Markowitz Efficient Frontier and the Capital Market Line.

2. Which of the following statements about the efficient frontier is true? a) In practice, only the market portfolio is on the efficient frontier. b) The portfolios on the efficient frontier are only dominated by other portfolios on the efficient frontier. c) The efficient frontier tends to be concave. d) Several of the above statements are true. e) None of the above statements are true. The efficient frontier is a set of portfolios that minimize the standard deviation for their respective expected returns., so A is false. The portfolios on the efficient frontier are not dominated by any portfolios, so B is false. C is correct. Page 4 of 21 Please see over

Harry Markowitz 1991, developed a theory of “Portfolio choice”, that allows the investors to examine the risk as per the expected returns. In modern World, this theory is known as Modern portfolio theory (MPT). It attempts to attain the best portfolio expected return for a predefined portfolio risk, or to minimise the risk for the predefined expected returns, by a careful choice of assets. Though it’s a widely used theory, still has been challenged widely. The critics question the feasibility of theory as a strategy for

Productive efficiency occurs when the firm produces its output at the least possible cost per unit. This requires the firm to produce at the minimum point of its long-run average cost curve. Allocative efficiency occurs when the goods that are being produced are the ones consumers most prefer. In order to achieve these efficiencies, firms are required to produce where price (which measures the consumers marginal valuation of the last unit of the product) equals marginal cost (which measures the opportunity cost of using resources to produce the last unit).

In this case, the Partner’s Treasury Department has computed all the portfolios for minimum level of risk with different types of assets, more specifically, adding Real Estate Investment Trusts (REITs), Commodities or both, from an undefined approach. Since the results are identical as calculated from Mean-Variance Theory, they should be the optimal portfolios for each target level of return. Therefore a graph with efficient frontier, which represents the optimal portfolios with different assets, is constructed based on Exhibit 5 to 8 for comparison. [Appendix B] Technically, any portfolio on the efficient frontier is an optimized portfolio and is indifferent from each other in terms of risk/return trade off.

2: Productive efficiency: The concept of productive efficiency refers to use the given cost to maximise the health outcome, or maximize the outcome within the least cost. In health care, productive efficiency permits the evaluation of the relative value for money to be used for interventions with comparable outcomes. However, widely speaking, productive efficiency cannot emphasize the impact of reallocating resources such as from one medical field to another because the health outcomes are disproportionate.

The correlation between the market portfolio and HML and the correlation between intercept and HML is -0.335 and -0.070, which indicates a moderate negative relationship between market portfolio and HML, and weak negative relationship between intercept and HML. Also, the correlations between the market portfolio and SMB, and between the SMB and HML are 0.348 and 0.191 respectively, which means that there are some positive relationships between them.

13. Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz?

In the efficient market everyone make a decision based on the information they have got. In the real circumstances, there is an agency problem so the agents know more information than the shareholder, so they make high investment and make abnormal profit. This is known as a corporate fraud. If the investors find out about this the fraudulent activity then this cause to stop the investments in particular sector. This lead to decrease share price in particular sector. If the price gone up this means that market is in-efficient.

It would be great to live in a world where investing provided guaranteed payout with little or no risk, however, we all realize that is not the way investing works. Generally, the greater the risk, the greater potential for return or worse, loss. How we perceive and respond to risk is a very personal decision and there are several factors that go into making that decision. In this paper, I will discuss the risk of stock investing. There are two types of risk involved in investing in stock. One is diversifiable risk and is completely controlled by the investor. It means that a portfolio should be filled with stocks of varying degrees of risk. The other type of risk is market risk. The

Moreover, once SMB and HML are defined, the corresponding coefficients bs and bv are determined by linear regressions and can take negative values as well as positive values. The signs of the coefficients suggested that small cap and value portfolios have higher expected returns and arguably higher expected risk than those of large cap and growth portfolios.

Technical efficiency is the effectiveness with which a given set of inputs is used to produce an output. A firm is said to be technically efficient if a firm is producing the maximum output from the minimum quantity of inputs, such as labor, capital and technology (National Institute of Health, 1999).

risk while maintaining a high return. The most conventional view argues that an investor can achieve optimal

To reduce a firm’s specific risk or residual risk a portfolio should have negative covariance or rather it should have no variance at all, for large portfolios however calculating variance requires greater and sophisticated computing power. As such, Index models greatly decrease the computations needed to calculate the optimum portfolio. The use of such Index models also eliminates illogical or rather absurd results. The Single Index model (SIM) and the Capital Asset Pricing Model (CAPM) are such models used to calculate the optimum portfolio.

Suppose there is economies of scale or increasing returns to scale. Under full utilization of resources, the production possibility frontier is convex towards the origin. If there is increasing returns to scale in either or both industries and there is one factor of production then the production set is non-convex.