Question

3. (a) In the case of multiple risky assets, explain the concepts of efficient frontier and feasible region. 5 points] (b) Suppose there are n risky assets (e.g. stocks) and a risk-free asset in the market. Explain how a mean-variance investor allocates his wealth across these assets. [10 points

Answer 1

1)IN CASE OF MULTIPLE RISKY ASSETS.EXPLAIN THE CONCEPTS OF EFFICIENT FRONTIER AND FEASIBLE REGION?

A) In the absence of the opportunity to hold a risk free asset this region is the opportunity set the feasible set,The positively sloped top boundary of this region is a portion of a hyperbola and is called the efficient frontier.

-Efficient Frontier Tangency Portfolio Individual Assets risk free rate Best possible CAL Standard Deviation Expected Re turn

The efficient frontier is the set of the portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return,portfolios that lie below the efficient frontier are sub optimal because they do not provide enough return for the level of risk.

b) suppose they are n risky assets and a risk free asset in the market,explain how a mean variance investor allocates his wealth across these assets?

A) In the above question we understood the concept of the frontier and now let us take an image to understand the points clearly
Mean Variance Portfolio Choice Rules The Markowitz decision rule provides the principle by which a mean-variance investor facing the choice of putting all her money in Asset A or all her money in Asset B can sometimes reach a decision. - This investor prefers A to B if either the mean return on A is equal to or larger than that on B, but A has a smaller standard deviation of return than B the mean return on A is strictly larger than that on B, but A and B have the same standard deviation of return

Investor MVO Market Information Procedure Information asset class selection historical retums vaniances and investment MVO algorithm constraints Covariances efficient frontier and tangent portfolio optimal asset allocation investment risk-free rate objectives

so by this images and the information provided in that can be optimal to understand asset relocation and was made quite deliberately and used at the risk free rate.