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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