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Characteristics of an Efficient Portfolio

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1.) What are characteristics of an efficient portfolio? How are a portfolio's return and standard deviation determined?  How must assets be evaluated to achieve a minimum variance portfolio? Explain your answer.

2.) What are examples of active and passive portfolio management techniques? Why would a portfolio manager pursue active instead of passive techniques?  Is it ever preferable to use a passive technique? Why or why not?

3.) Does international diversification enhance risk reduction? Why or why not? What measures may be taken to reduce risks of international portfolio investing?

4.) What are unique risks associated with foreign investments? How might an investor protect his or her portfolio against such risks? Is it possible to protect a portfolio from all risk? Explain your answer.

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1.) The efficient portfolio is one that gives the greatest expected return for a given level of risk, or for an expected level of return gives the lowest risk. Efficient portfolio is also called optimal portfolio. The efficient portfolio is one that lies on the efficient frontier. The efficient portfolio also gives the best returns achievable for a given level of risk. The portfolio's return is a method that takes into consideration dividends and capital appreciation. The standard deviation of a portfolio shows not only the standard deviation of the stocks that made up the portfolio but also how the returns on the stocks which comprise the portfolio vary together. For achieving minimum variance portfolio, the assets should be combined in such a way that the result will be the least possible variance. In case of stocks it is the portfolio with the lowest betas. The reason for this is that this combination of assets will have lowest sensitivity to risk. In a minimum-variance portfolio, stocks will have lowest volatility. Usually the minimum-variance portfolio is constructed by making maximum use of diversification to achieve a risk level that is lower than the individual risk level. From another perspective, a portfolio of individually risky assets that when taken together result in the lowest possible risk level for the expected return.

2.) Some examples of active portfolio management techniques are merger arbitrage, short positions, and options writing. Some examples of passive portfolio management techniques are investment in certain mutual funds like Vanguard 500, and State Street Corp. A portfolio manager ...

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Hatim Baxamusa, MBA
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  • BSc , University of Calcutta
  • MBA, Eastern Institute for Integrated Learning in Management
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