Portfolio selection

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Information about Portfolio selection
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Published on March 2, 2014

Author: abilantony

Source: slideshare.net

PORTFOLIO SELECTION (Page no:177) By Abila Antony

PORTFOLIO SELECTION  Goal: finding the optimal portfolio  OPTIMAL PORTFOLIO: Portfolio that provides the highest return and lowest risk.  Method of portfolio selection: Markowitz model

Feasible set of portfolio  Also known as portfolio opportunity set.  With a limited no of securities an investor can create a very large no of portfolios by combining theses securities in different proportions.

EFFICIENT PORTFOLIO Pageno:17 Portfolio no Expected return 8 Standard deviation 1 5.6 4.5 2 3 4 5 6 7 8 9 7.8 9.2 10.5 11.7 12.4 13.5 13.5 15.7 5.8 7.6 8.1 8.1 9.3 9.5 11.3 12.7 10 16.8 12.9

Compare 4 & 5 which have same standard deviation Pf no Expect Standard ed deviation return 1 5.6 4.5 2 7.8 5.8 3 9.2 7.6 4 5 10.5 8.1 11.7 8.1 6 12.4 9.3 7 13.5 9.5  Higher return?? Pf no.5 gives higher expected return which is more efficient portfolio

Compare 7 & 8 which have same Expected return Pf no Expected return Standard deviation 1 5.6 4.5 2 7.8 5.8 3 9.2 7.6 4 10.5 8.1 5 11.7 8.1 6 12.4 9.3 7 8 13.5 13.5 9.5 11.3 9 15.7 12.7 10 16.8 12.9  Lower standard deviation?? Pf no.7 which is more efficient portfolio

CRITERIA: EFFICIENT PROTFOLIO??  Given 2 portfolio with the same expected return, the investor would prefer the one with the lower risk.  Given 2 portfolio with the same risk, the investor would prefer the one with the higher expected return.

GRAPH Expected return Y B F F E C X D Standard deviation (risk)

 Consider E & F – GRAPH both have same return but E has less risk then portfolio E would be preferred Expected return Y F F E X Standard deviation (risk)

GRAPH Expected return  Now consider C & E – B Y E C X Standard deviation (risk) both have same risk but portfolio E offer more return then portfolio E would F preferred.

GRAPH Expected return  Consider C& A – both have same return but C has less risk then portfolio C would be preferred B Y F C X Standard deviation (risk)

Result E F C E Same return but E has less risk than F Same risk But E offer more return E has preferred E has preferred C A Same return But C has less risk C has preferred A B Same level of risk But B has preferred C has minimum risk & B has Maximum risk Based on these we drawing efficient frontier.

Portfolio C has the lowest risk compared to all other portfolios. Here portfolio C represents the global minimum variance portfolio. GRAPH Expected return Y B F F E X C D Standard deviation (risk)

GRAPH EFFICIENT FRONTIER Expected return Y B F F E C X D Standard deviation (risk)

B C  It contain all the efficient portfolio.  Lying between the global minimum variance portfolio (risk) & the maximum return.

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