The Efficient Frontier

The Efficient Frontier - The Efficient Frontier • • •...

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Unformatted text preview: The Efficient Frontier • • • The efficient frontier represents that set of portfolios with the maximum rate of return for every given level of risk, or the minimum risk for every level of return Efficient frontier are portfolios of investments rather than individual securities except the assets with the highest return and the asset with the lowest risk The efficient frontier curves 7- 1 Exhibit 7.14 7- 2 Exhibit 7.15 7- 3 Efficient Frontier and Investor Utility • • • • An individual investor’s utility curve specifies the trade-offs he is willing to make between expected return and risk The slope of the efficient frontier curve decreases steadily as you move upward The interactions of these two curves will determine the particular portfolio selected by an individual investor The optimal portfolio has the highest utility 7- 4 Efficient Frontier and Investor Utility • • • The optimal lies at the point of tangency between the efficient frontier and the utility curve with the highest possible utility As shown in Exhibit 7.16, Investor X with the set of utility curves will achieve the highest utility by investing the portfolio at X As shown in Exhibit 7.16, with a different set of utility curves, Investor Y will achieve the highest utility by investing the portfolio 7- 5 at Y Exhibit 7.16 7- 6 The Internet Investments Online • http://www.pionlie.com • http://www.investmentnews.com • http://www.ibbotson.com • http://www.styleadvisor.com • http://www.wagner.com • http://www.effisols.com • http://www.efficientfrontier.com 7- 7 ...
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The Efficient Frontier - The Efficient Frontier • • •...

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