Lecture 3

Question 1

Efficient frontier

Answer 1

• locus of all non-dominated portfolios in the mean-standard deviation space
• By definition, no (“rational”) mean-variance investor would choose to hold a portfolio not located on the efficient frontier
• The shape of the efficient frontier is thus of primary interest

Question 2

Short Selling - explain

Answer 2

• Borrow a stock, sell it to cash in and then restore it to the original owner by buying it back later
• Possible to go short in order to gain on expectations that stock price will decline

Question 3

Frontier Portfolio

Answer 3

is a portfolio which displays minimum variance among all feasible portfolios with the same expected return