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Analyze the basic principles of portfolio theory and explain what is an efficient portfolio.
Member rating: No Rating | Words: | Submitted: Mon Jun 19 2006
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The central core of this essay is to analyze the basic principles of portfolio theory and explain what is an efficient portfolio. The founder of this modern theory is H.Markowitz, and in a few words, it deals with the creation and the management of portfolios. It is actually the way, in which an individual investor may hypothetically arrive at the maximum expected return from a varied portfolio of financial securities, which has attached to it a given level of risk. In order to make a full analysis of portfolio theory, we have to set up by uttering its assumptions. Portfolio theory that was established in the early 1950s has five basic assumptions, which are: "> Agents prefer more wealth to less.> Agents are risk-averse and require a higher expected rate or return for taking on more risk.> The rates of return follow a normal distribution. This means that the risk...
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