Quantitative Portfolio Management - Homework 1 - Case Study Example

From the graph, Roy (1952) argued that investors should pick portfolios in order to maximize the likelihood of getting above some threshold minimum return.. Drawing a straight line from this minimum return tangent to the efficient frontier. Lower thresholds result in optimal portfolios with less return / risk, once you have identified the efficient frontier Using the idea that risks come from different sources, a “single index model” assumes that actual returns can be separated into systematic (i.e. market-related) and firm-specific parts … here, the “market” (e.g. S&P500 index) is the source of market-related movements in security i: Since there is no perfect match for this assets, that various portfolio combinations of most two-asset portfolios will lie on a curve to the left as you reduce correlation between pairs of assets, you will have to risk for a given level of portfolio return.

Result: One portfolio (P) dominates all of the other efficient portfolio on the efficient set Investors who choose combinations of P and the risk-free asset get the highest return for a given level of risk, compared to all other risky