Fin 402 Week 4 Questions

Week 4 Questions

Pardip Singh

FIN/402

August 1, 2012

Ted Haas

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.

The characteristic of an efficient portfolio contains specific set of investment assets like stocks, bonds, commodities, and money market instrument. These assets create the highest possible rate of return for a specific level of desired risk for the investors. The expected return on a portfolio is the weighted average of the expected rate of return on assets, comprising the portfolio. There are two major determinants of portfolio return: expected rate of return on each asset and the relative share of each asset in the portfolio. The formula are E(Rx) = Expected return, Ri = return and Pi = Probability. This formula helps with the two ways of getting the portfolio return. The assets can be looked at closely to invest into only the good assets to achieve minimum variance portfolio.

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?

In management techniques, active asset management is based on a belief that a specific style of management or analysis can produce returns that beat the market. Passive asset management is based on the belief that markets are efficient, market returns cannot be surpassed regularly over time, and low-cost investments held for the long-term will provide the best returns. The active side of this might work better for a person because they will be very much involved with the process. The passive can be for an investor who likes to invest in a longer term and does not worry as much as an active investor.

Does international diversification enhance risk...