Question

2- why would a financial institution not always choose to operate with a minimum risk portfolio?

Answer 1

Financial Institution may not always want to minimize the portfolio risk because - Higher the risk, higher are the returns. If the objective of the firm is to take earn superior returns they may go for higher risk. Return per unit of risk is a better measure and this measure is usually maximized while making investment decisions. So considering risk in isolation is never a better option. Also, firms have strategies to diversify or transfer the risks using various techniques like hedging,etc. Hence Minimum risk portfolio doesn't make sense.In contrast Portfolio with Maximum return/risk (Sharpe ratio) or Minimum Risk/Return ratios are chosen.