Portfolio Management Fin 550
1.Analyze the relationship between risk and rate of return, and suggest how you would formulate a portfolio that will minimize risk and maximize rate of return. The relationship between risk and rate of return is risk determines expected rates of return on every existing asset investment. The Risk-Return relationship is characterized as being a "positive" or "direct" relationship. (Importance of risk relationship , 2001). In other worlds if the risk of investing on an investment is high then the return will also be high.. Alternatively, if an investment has relatively lower levels of expected risk then the investor will get relatively lower
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All things held equal one would want to minimize volatility in their portfolio. The efficient frontier also states that if one limits themselves to low risk securities the return on the investment will be low too. So what one should really do is include some higher growth, higher risk securities in their portfolio, but combine them in a smart way, so that some of their fluctuations cancel each other out. Harry Markowitz and Bill Shape. For instance they believe that if one has data for a collection of securities like the S & P 500 stocks, and one graphs the return rates and standard deviations for these securities, and for all portfolios one can get by allocating among them. Markowitz showed that you get a region bounded by an upward-sloping curve, which he called the efficient frontier. Another characteristic of the efficient frontier is that it's curved, not straight. This is actually significant in fact; it is the key to how diversification lets one improve their reward-to-risk ratio. Using the graphing method to understand where the investor stands can be determined by the efficient frontier. The curve and lines of the graph can determine where the asset investment stands in terms of value.
5. Consider the economic outlook for the next year in order to recommend the ideal portfolio to maximize the rate of return for the short term and long term. Explain the key differences between the short and long