10 Questions
What measure did Harry Markowitz derive for portfolio risk?
Variance of the rate of return
According to Markowitz, what is the importance of diversifying investments in a portfolio?
To reduce the total risk of the portfolio
What did the Markowitz model show about diversification of investments in a portfolio?
How to effectively diversify
What did Markowitz base his portfolio model on?
Assumptions regarding investor behavior
What did Markowitz derive for a portfolio of assets and an expected risk measure?
Expected rate of return
What does a larger variance or standard deviation of expected returns indicate?
Greater dispersion of returns around the expected value
Which measure of risk focuses only on deviations below the mean value?
Semivariance
What does a larger range of expected returns imply?
Greater uncertainty regarding future expected returns
What is the extension of the semivariance measure that only computes expected returns below zero?
Downside semivariance
What is the measure of risk that is assumed to reflect greater uncertainty regarding future expected returns?
Range of returns
Study Notes
Portfolio Risk and Diversification
- Harry Markowitz derived the variance or standard deviation of expected returns as a measure of portfolio risk.
Importance of Diversification
- Diversifying investments in a portfolio is important because it reduces risk by spreading investments across different assets.
Markowitz Model
- The Markowitz model shows that diversification of investments in a portfolio can reduce risk and increase expected returns.
Portfolio Model
- Markowitz based his portfolio model on the concept of expected returns and risk (variance or standard deviation).
Portfolio Risk Measure
- Markowitz derived the standard deviation of expected returns as a measure of portfolio risk, which reflects the dispersion of expected returns.
Risk Implication
- A larger variance or standard deviation of expected returns indicates a higher level of risk in a portfolio.
Downside Risk
- The semivariance measure focuses only on deviations below the mean value, which is a measure of downside risk.
Uncertainty of Expected Returns
- A larger range of expected returns implies a higher level of uncertainty regarding future expected returns.
Extension of Semivariance
- The extension of the semivariance measure that only computes expected returns below zero is known as downside deviation.
Uncertainty and Risk
- A measure of risk that is assumed to reflect greater uncertainty regarding future expected returns is standard deviation.
Test your knowledge of Markowitz Portfolio Theory with this quiz. Explore the development of the portfolio model and the quantification of risk variables by Harry Markowitz. Delve into the expected rate of return for a portfolio of assets and an expected risk measure.
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