FINC314 Lecture Notes - Lecture 13: Harry Markowitz, Standard Deviation, Efficient Frontier
10 Feb 2020
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Document Summary
We can generalize the portfolio construction problem to the case of many risky securities and a risk-free asset. As in the two risky assets example, the problem has three parts. First, we identify the risk-return combinations available from the set of risky assets. Second, we identify the optimal portfolio of risky assets by finding the portfolio weights that result in the steepest cal. Finally, we chose an appropriate complete portfolio by mixing the risk-free asset with the optimal risky portfolio. For his foundational work in this area, harry markowitz received the nobel prize in 1990. The markowitz portfolio selection model assumes normality with a lack of skewness and a lack of kurtosis. We begin by determining the risk-return opportunities available to the investor which are summarized by the minimum-variance frontier of risky assets. This frontier is a graph of the lowest possible variance that can be attained for a given portfolio expected return in the cross-section.
