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ch5 Modern Portpolio 02
ch5 Modern Portpolio 02
Modern Portfolio
Concepts
Required computations (10-12)
• Efficient portfolio
– A portfolio that provides the highest return for a
given level of risk
• Disadvantages of International
Diversification
– Currency exchange risk
– Less convenient to invest than U.S. stocks
– More expensive to invest
– Riskier than investing in U.S.
Traditional Approach
versus
Modern Portfolio Theory
• Efficient Frontier
– The leftmost boundary of the feasible set of
portfolios that include all efficient portfolios:
those providing the best attainable tradeoff
between risk and return
– Portfolios that fall to the right of the efficient
frontier are not desirable because their risk
return tradeoffs are inferior
– Portfolios that fall to the left of the efficient
frontier are not available for investments
• Portfolio Beta
– The beta of a portfolio; calculated as the
weighted average of the betas of the individual
assets the portfolio includes
– To earn more return, one must bear more risk
– Only nondiversifiable risk (relevant risk)
provides a positive risk-return relationship