Modern Portfolio Theory Portfolio choice Chapter 6 By ding zhaoyong
Modern Portfolio Theory Portfolio Choice Chapter 6 By Ding zhaoyong
Main contents The efficient set theorem Concavity of the efficient set The market model Diversification and market risk Allowing for riskfree lending Allowing for risk free borrowing Allowing for both riskfree borrowing and lending
Main Contents • The efficient set theorem • Concavity of the efficient set • The market Model • Diversification and market risk • Allowing for riskfree lending • Allowing for risk free borrowing • Allowing for both riskfree borrowing and lending
How to make portfolio choice How can Markowitz's approach be used to select portfolio once it is recognized that there are an infinite number of portfolio available for investment? What happens when the investor considers investing in a set of securities, one of which is riskless? What happens if the investor is allowed to buy securities on margin?
How to make portfolio choice • How can Markowitz’s approach be used to select portfolio once it is recognized that there are an infinite number of portfolio available for investment? • What happens when the investor considers investing in a set of securities, one of which is riskless? • What happens if the investor is allowed to buy securities on margin?
The efficient set Theorem The efficient set theorem can be stated An investor will choose his or her optimal portfolio from the set of portfolios that 1. Offer maximum expected return for varying levels of risks, and 2. Offer minimum risk for varying levels of expected returns
• The efficient set theorem can be stated: An investor will choose his or her optimal portfolio from the set of portfolios that 1. Offer maximum expected return for varying levels of risks, and 2. Offer minimum risk for varying levels of expected returns. The Efficient Set Theorem
The efficient set Theorem The feasible set The feasible set is also called for the opportunity set, which represents all portfolios that could be formed from a group ofn securities. All possible portfolios that could be formed fromn securities lie either on or within the boundary of the feasible set, which has a umbrella-type shape
The Efficient Set Theorem • The feasible set – The feasible set is also called for the opportunity set, which represents all portfolios that could be formed from a group of N securities. – All possible portfolios that could be formed from N securities lie either on or within the boundary of the feasible set, which has a umbrella-type shape