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Selecting Optimal Portfolio for an Investor

In the previous articles, we learned that an investor can invest in a combination of risk-free asset and risky assets anywhere on the capital allocation line. A rational investor is also risk-averse and has a utility indifference curve that characterizes his risk-return expectations. However, the problem is that on the capital allocation line, the investor can create

Effect of Correlation on Diversification

In this article, we will look at how correlation affects the diversification benefits of a portfolio. Let’s take a portfolio with two assets. The correlation between the two assets can range from -1.0 to 1.0 and depending on the correlation figure the shape of the efficient frontier will change. The following graph shows how the

Portfolio Risk & Return – Part 1B – Video

This video by Arif Irfanullah provides a very clear conceptual understanding of the portfolio risk and return concepts as a part of the CFA Level 1 syllabus. This video talks about Markowitz Efficient Frontier Capital Allocation Line Risk Aversion Risk-Return Indifference Curve Optimal Investor Portfolio

The Minimum Variance Frontier & Efficient Frontier

Two asset classes (stocks and bonds for example) can be combined with varying proportions to create an infinite number of portfolios. An investor can calculate the expected returns and variances of a two asset portfolio and plotting these on the Y (returns) and X (variances) axis of a graph. Global Minimum Variance Portfolio: The portfolio

Constructing an Efficient Frontier

The concept of Efficient Frontier was first introduced by Harry Markowitz in his paper on Portfolio Selection (1952 Journal of Finance). The portfolio theory considers a universe of risky investments and explores these possible investments in order to find the optimum portfolio. So, for a given amount of risk, MTP explains how select a portfolio