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Given a choice between two assets with equal rates of return, select the asset with lowest level of risk.
Markowitz Model Assumptions
Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period.
Investors maximize one-period expected utility, and their utility curves demonstrate diminishing marginal utility of wealth.
Investors estimate the risk of the portfolio on the basis of the variability of expected returns.
Investors base decisions solely on expected return and risk, so their utility curves are a function of expected return and the expected variance (or standard deviation) of returns only.
For a given risk level, investors prefer higher returns to lower returns. Similarly, for a given level of expected return, investors prefer less risk to more risk.
A single asset or portfolio of assets is considered to be efficient if no other asset or portfolio of assets offers higher expected return with the same (or lower) risk or lower risk with the same (or higher) expected return.
A measure that only considers deviations below the mean.
A measure of the degree to which two variables move together relative to their individual mean values over time.
Represents that set of portfolios that has the maximum rate of return for every given level of risk or the minimum risk for every level of return.
Every portfolio that lies on the efficient frontier has either a higher rate of return for equal risk or lower risk for an equal rate of return than some portfolio beneath the frontier.
The efficient portfolio that has the highest utility for a given investor.
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