FIN 521 Chapter Notes - Chapter 6: Efficient Frontier, Modern Portfolio Theory, Harry Markowitz

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10 Oct 2012
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One basic assumption of the portfolio theory is that investors want to maximize their returns from your total set of investments for a given level of risk. Your portfolio should include all your assets and liabilities, not only your marketable securities but also your car, house, and less marketable investments such as coins, stamps, art, antiques, and furniture. Risk aversion: portfolio theory assumes that investors are risk averse, meaning that given a choice between two assets with equal returns, investors will select the asset with the least risk. Most investors are risk averse because they purchase various types of insurance, including life insurance, car insurance, and health insurance. Also the difference in promised yield (the required return) for different grades of bonds with different degrees of credit risk. Risk: the uncertainty of future outcomes or the probability of an adverse outcome.

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