Mean Variance Analysis

Chapter 2 Mean-Variance Analysis The preceding chapter studied an investors selection between a try-free asset and a single inquisitive asset. This chapter adds realism by giving the investor the opportunity to choose among six-fold risky assets. As a University of Chicago graduate student, nark Markowitz, wrote a path-breaking obligate on this topic (Markowitz 1952).1 Markowitzs brain wave was to recognize that, in allocating wealth among different risky assets, a risk-averse investor should focus on the expectation and the risk of her unite portfolios return, a return that is a?ected by the somebody assets diversi?cation possibilities. Because of diversi?cation, the magnetic feature of a particular asset when held in a portfolio empennage di?er from its appeal when it is the sole asset held by an investor. Markowitz proxied the risk of a portfolios return by the pas seul of its return. Of course, the unevenness of an investors total portfolio return depends on the return variances of the individual assets include in the portfolio. But portfolio return variance withal depends on the covariances of the individual assets 1 His wager on portfolio theory, of which this condition was the beginning, won him a share of the Nobel prize in political economy in 1990. Initially, the importance of his work was not widelyrecognized.

Milton Friedman, a member of Markowitzs doctoral dissertation committee and who also became a Nobel laureate, questioned whether the work met the requirements for an economics Ph.D. See Bernstein (Bernstein 1992). 37 38 CHAPTER 2 . MEAN-VARIANCE abstract returns. Hen! ce, in selecting an optimal portfolio, the investor needs to con- sider how the co-movement of individual assets returns a?ects diversi?cation possibilities. A rational investor would want to choose a portfolio of assets that e?ciently trades o? higher expected return for land variance of return. Interestingly, not all portfolios that an investor...If you want to get a full essay, roll it on our website: OrderCustomPaper.com

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