Questions Related to Modern Portfolio Theory

Questions Related to Modern Portfolio Theory - 3. If there...

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Questions Related to Modern Portfolio Theory 1. Suppose that all assets have the same standard deviation of return and the same correlation with each other. Then they will all be held in equal proportions in an optimized portfolio. This is false. In this case, the weights in the optimal portfolio will be driven by the expected returns of the assets. The asset with the highest expected return will get the highest weight. 2. True or false: At least one of the assets in an optimized portfolio must lie on the efficient frontier (or, in other words, is part of the efficient set of portfolios). This is false in general. When there are many risky assets, none of them lies on the efficient frontier. (Note: when there are only two risky assets, both lie on the minimum variance frontier, and one or both may lie on the efficient frontier).
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Unformatted text preview: 3. If there is an increase in an asset’s variance, will its weight in an optimal portfolio be reduced? Yes. This effect will be larger the less diversified the portfolio is. 4. If there is a general increase in the level of correlation among assets, will the efficient frontier shift to the right when graphed in expected return-standard deviation space? Yes. Increasing correlation means less diversification benefits. 5. If the correlation between a pair of assets rises to a very high level, an investor who wants an optimized portfolio will eventually eliminate them from the portfolio. True or false? If short-selling is allowed, this is false. By short-selling, we can take advantage of the high correlation between a pair of stocks. However, when short-selling is not allowed, this will be true....
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This note was uploaded on 02/06/2012 for the course MGMT 411 taught by Professor Clarke during the Spring '09 term at Purdue.

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