Question

clearly detail the steps involved in arriving at the market (optimal) portfolio.

Answer 1

An optimal market portfolio is one in which the profile has been developed keeping the fundamental of high returns with moderate risk in mind. It is assumed that the funds having considerable risk will help the investor to reap the maximum benefits. So, the funds are selected keeping this fundamental in mind.

The fundamental steps which are followed in developing an optimal market portfolio are as follows:

· Identify the asset classes in which the investor will be interested

· Based on the interest and objectives of the investor, target weightage can be assigned to the asset classes

· Accordingly the returns associated with each asset can be plotted on a graph

· The portfolio developer needs to manipulate and tweak the weightages assigned to each asset class

· Again calculate the returns and plot it on the graph

· Doing this, we will get the efficient frontier line

· The funds which lie in the middle of and above the efficient frontier line comprise the optimal portfolio

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