Question

2. You are advising several individual investors who are interested in investing in portfolios comprised of both stocks and bonds. In preparation for meeting with these various investors, you plot the investment opportunity set for stocks and bonds. Given this information, why might you advise some of the investors to invest in a portfolio other than the minimum variance portfolio

Answer 1

A minimum variance portfolio is combination of portfolio of securities that minimizes the price volatility of overall portfolio.High variance in a stock is related to higher risk and return while low variance is related to low risk and return. High variance stocks is good for risk takers while low variance is good for conservative investors.

However according to Modern Portfolio theory, we can reduce variance or risk without compromising and maximize expected return by asset allocation. We can build diversified portfolio with not just assets but also bonds, commodities, insurance products, REITs etc.

So, I advised some of the onvestors to invest in a portfolio other than minimum variance portfolio due to different factors related to the 1) level of risk they are willing to take 2) Expected return 3) Age of the individual 4) Future goals and 5) Products which will maximize their returns