--%>
Assignment Help - homework help

Explain the Modern portfolio theory

Explain the Modern portfolio theory.

E

Expert

Verified

In the Modern Portfolio Theory world of N assets there are 2N + N(N − 1)/2 parameters: standard deviation, one per stock; expected return, one per stock; correlations, among any two stocks (select two from N without replacement, order unimportant). To Markowitz all investments and all portfolios should be compared and contrasted through a plot of expected return versus risk that measured by standard deviation. When we write µA to shows the expected return from investment or portfolio A (and the same for B and C, etc.) and σB for its standard deviation after that investment/portfolio A is at least as fine as B if µA ≥ µB and σA ≤ σB.

The mathematics of risk and return is extremely simple. See a portfolio, Π, of N assets, along with Wi being the fraction of wealth invested into the ith asset. The expected return is subsequently

721_expected return.png

and the standard deviation of the return, therefore the risk is

1788_standard deviation.png

Here ρij is the correlation among the ith and jth investments, along with ρii = 1.

   Related Questions in Financial Management

  • Q : Managerial |Accounting help Janice

    Janice Colangelo heads the Training Centre of the large HR Consulting firm EMT Consulting. The firm has three major departments: Recruitment, Training and Career Services. The Training Centre provides management training for employees of various businesses. Recruitment provides recruitment service

    		•
  • Q : Very small amount of debt is as

    An optimal capital structure exists, explain the reasons. Why very small amount of debt is as undesirable as is very big amount debt?

    		•
  • Q : Describe long position in a futures

    Describe long position in a futures (or forward) contract?A futures (or forward) contract is a vehicle for purchasing or selling a stated amount of foreign exchange at a stated price per unit at a particular time in the future. If the long hold

    		•
  • Q : Illustrates Black–Scholes Equation with

    Illustrates Black–Scholes Equation with an example?

    		•
  • Q : Define market participants in the

    Define market participants in the foreign exchange market?The market participants which comprise the FX market can be categorized in five groups: international banks, non-bank dealers, bank customers, FX brokers, and central banks. Internation

    		•
  • Q : How is estimate of volatility or the

    How is estimate of volatility or the implied volatility used?

    		•
  • Q : What are random factors for

    What are random factors for risk-neutral drifts?

    		•
  • Q : Problem related to margin account

    Suppose today's settlement price on a CME DM futures contract is $0.6080/DM. You have a short position in one contract. Your margin account presently has a balance of $1,700. The next three days' settlement prices are $0.6066, $0.6073, & $0.5989. Compu

    		•
  • Q : What are retained earnings What are

    What are retained earnings? Why are they important?

    		•
  • Q : Theory of comparative advantage and

    How does the theory of comparative advantage associate to the currency swap market?Name recognition is very important in the international bond market. Without it, even a creditworthy corporation will determine itself paying higher interest rat

    		•