Question

Question # 3. Markowitz theory indicates to create and construct a portfolio of assets to maximize returns within a given level of risk, or to devise one with a desired, specified and expected level of return with the least amount of risk. Under this broader concept, answer the followings:

1. Justify, why an optimal portfolio should lie on security market line curve

                                                          

b. Being an efficient market investor, justify how an efficient frontier curve can be helpful for you in portfolio selection process

Answer 1

Ans :

a. Optimal Portfolio is the tangency line of efficient frontier and SML (security market line). Now efficient frontier are a set of best risk-reward combinations for an investor. So on the tangent of efficient frontier describe the best possible return given a specified risk level. That is why optimal portfolio should lie on security market line.

b.  how efficient frontier curve can be helpful in the portfolio selection process: Efficient frontier curve describes the values of the highest expected return in investor can achieve given a specified risk level. assets/portfolio those which are below the curve are not at an optimal level of stock. To choose best risk reward an investor always should look for portfolio near efficient frontier curve only.