Table of Contents
- 1 Why is the efficient frontier a straight line?
- 2 Why is the efficient frontier a hyperbola?
- 3 How would you describe the efficient frontier graph?
- 4 What is efficient frontier portfolio?
- 5 Why is the efficient frontier important?
- 6 What is efficient portfolio frontier?
- 7 Can diversification create an efficient portfolio on a curved line?
- 8 How does the frontier graph help investors choose the portfolio combinations?
Why is the efficient frontier a straight line?
The Efficient Frontier of a Riskless Asset and a Risky Asset Constitutes the Capital Market Line. A portfolio consisting of a riskless asset and a risky asset is a straight line. Because the riskless asset has no variance, the risk of the portfolio increases proportionately to the weighting of the risky asset.
Why is the efficient frontier a hyperbola?
The efficient frontier is the upper leg of the hyperbola originating from the minimum variance portfolio (MVP) in case of n risky assets. The risk-free asset is introduced in order to create an exchange or a market economy in which agents are able to borrow and lend unlimited amounts at the risk-free rate.
How would you describe the efficient frontier graph?
An efficient frontier is a graph that plots the expected return on a portfolio of investments on the y-axis and its risk as measured by its standard deviation on the x-axis.
Is efficient frontier a parabola?
The efficient frontier turns out to be a hyperbola.
How is the efficient frontier derived?
This frontier is formed by plotting the expected return. Expected return = (p1 * r1) + (p2 * r2) + ………… + (pn * rn), where, pi = Probability of each return and ri = Rate of return with probability….Example of the Efficient Frontier.
| Portfolio | Risk | Return |
|---|---|---|
| 1 | 15 | 10 |
| 2 | 9.92 | 12.5 |
| 3 | 12.99 | 15 |
| 4 | 20.88 | 17.5 |
What is efficient frontier portfolio?
The efficient frontier is the set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. Portfolios that lie below the efficient frontier are sub-optimal because they do not provide enough return for the level of risk.
Why is the efficient frontier important?
Introduced by Harry Markowitz in 1952, the efficient frontier is a financial tool that helps an investor compose an investment portfolio with the best returns given the amount of risk. That theory represents a framework for creating an investment portfolio with the highest returns given a limited amount of risk.
What is efficient portfolio frontier?
What is the efficient frontier curve and why is it important?
If such optimization of return versus risk is successful, the portfolio will lie on the efficient frontier curve. Optimal portfolios on the efficient frontier tend to be more diversified. The curve is essential in showing how diversification improves the risk/reward profile for the investor.
What is the efficient frontier of a portfolio?
A portfolio is said to be efficient if there is no other portfolio that offers higher returns for a lower or equal amount of risk. Where portfolios are located on the efficient frontier depends on the investor’s degree of risk tolerance. The efficient frontier is a curved line.
Can diversification create an efficient portfolio on a curved line?
Diversifying the assets in your portfolio leads to increased returns and decreased risks, which leads to a portfolio that is located on the efficient frontier. Therefore, diversification can create an efficient portfolio that is located on a curved line. How Does an Efficient Frontier Work?
How does the frontier graph help investors choose the portfolio combinations?
The decisions of the investors are always based on expected return and standard deviation as a measure of risk. This theory portrayed the importance of diversification. This efficient frontier graph helps investors choose the portfolio combinations with the highest returns with the least possible returns.