MBA Question Finance: Defining Terms
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Question: Define the following terms and explain how they affect one another. More specifically, for what purposes are they used and how do they relate to one another: efficient portfolio, individual investor, short selling, Sharpe ratio, beta and CAPM. Provide an example with each definition.
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Solution Summary
This is a referenced essay with at least four references in proper APA order that gives detailed definition of the terms. It not only define the terms, but also explains how they affect each other and their purpose.
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According to Jones (2009) an efficient portfolio provides the lowest level of risk possible for a given level of expected return. Investors can identify efficient portfolios by specifying an expected portfolio return and minimizing the portfolio risk at this level of return (Jones, 2009, p. 192). An example of an efficient portfolio is a market portfolio such as stocks, bonds, and commodities. For example, if an investor can achieve an annual return of 3% by investing only in U.S. government securities, then an expected return on investment of 10% is equal to 7% over the risk-free rate, or 10% - 3% = 7%.
An individual investor is one who purchases small amounts of securities for him/herself compared to the institutional investors (Kaniel, Saar, and Titman, 2008). This investor is also called a small investor.
Jones (2009) defines ...
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