Portfolio Risk and Return Quiz

Study Notes

Diversification and Markowitz Portfolio Theory

Markowitz Portfolio Theory states that diversification eliminates specific risk, also known as unsystematic risk or diversifiable risk.
The primary purpose of diversification in investment portfolios is to reduce risk by spreading investments across different asset classes, sectors, and securities.
Diversification does not affect undiversifiable risk, also known as systematic risk or market risk. This type of risk is inherent in the overall market and cannot be eliminated through diversification.
Markowitz Portfolio Theory suggests achieving diversification through combining assets that have low correlation. This means choosing investments whose returns are not closely linked to each other.
The Markowitz Model aims to provide tools for constructing efficient portfolios. An efficient portfolio maximizes expected returns for a given level of risk or minimizes risk for a given level of expected returns.
Markowitz Portfolio Theory mainly focuses on optimizing the risk-return trade-off of a portfolio. It helps investors understand the relationship between risk and expected return and construct portfolios that balance these factors.
Diversification reduces the variability of actual returns around the expected returns of a portfolio. This means that the actual returns of a diversified portfolio are more likely to be closer to the expected returns, reducing the risk of large deviations from the expected outcome.
Diversification aims to eliminate idiosyncratic risk in an investment portfolio. This is the risk associated with individual assets that can be mitigated by holding a diversified portfolio.
Markowitz Portfolio Theory suggests that diversification can effectively reduce systematic risk to an undiversifiable level. This means that while diversifying a portfolio cannot eliminate all risk, it can significantly reduce the risk associated with specific assets or sectors within a portfolio.

Description

Test your knowledge of portfolio risk and return with this quiz covering topics such as Markowitz Model, diversification, measurement of risk and return, and the principles of creating an efficient investment portfolio. Check your understanding of essential concepts in portfolio theory and diversification strategies.