--%>
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 : What is exact way of traders to use the

    What is the exact way of traders to use the gamma to calculate?

    		•
  • Q : Question on security returns Security

    Security returns are found to be less correlated across countries than in a country. Why can it be?Security returns are less correlated possibly because countries are distinct from each other in terms of industry structure, macroeconomic policie

    		•
  • Q : International finance the criteria for

    the criteria for a good international financial or monetary system

    		•
  • Q : Explain differences between foreign

    Explain the differences between foreign bonds & Eurobonds. Also describe why Eurobonds make up the lions share of the international bond market.The two segments of the international bond market are following:  foreign bonds & Eurobo

    		•
  • Q : What can a financial institution

    What can a financial institution frequently do for a DEU (deficit economic unit) that it would have trouble doing for itself if the DEU were to deal directly with SEU?

    		•
  • Q : Illustrates example of bid/offer on

    Illustrates an example of bid/offer on a call in put–call parity?

    		•
  • Q : Estimate the 30- day- 90- day

    Normal 0 false false

  • Q : Calculate the rate of return in terms

    Mr. James K. Silber, an avid international investor, only sold a share of Rhone-Poulenc, a French firm, for FF50. The share was bought for FF42 year ago. Now the exchange rate is FF5.80 per U.S. dollar and was FF6.65 per dollar a year ago. Mr. Silber attained

    		•
  • Q : What is GATT and what is its goal? What

    What is GATT and what is its goal?

    		•
  • Q : EBIT Boeing Company is expecting to

    Boeing Company is expecting to have EBIT next year of $10 million, with a standard deviation of $5 million. Boeing has $40 million in bonds with coupon of 8%, selling at par, which are being retired at the rate of $3 million annually. Boeing also has 200,000 shares of preferred stock, which pays ann

    		•