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1. Explain the concept of Markowitz Diversification. Be certain in your answer to explain the basis for this diversification and identify what type of risk
1. Explain the concept of Markowitz Diversification. Be certain in your answer to explain the basis for this diversification and identify what type of risk is being diversified out of the portfolio. 2. Based on your answer in (1.) above answer the following questions: a. How does the Nave Diversification approach differ from the Markowitz Diversification approach? b. How does the Simple Diversification approach differ from the Markowitz Diversification approach? 3. In developing the Markowitz Diversification Model, the Correlation Coefficient (r) was very important. Explain what variables we are correlating and how we measure the benefits of portfolio diversification by using the Correlation Coefficient. 4. Define what is meant by the term Efficient Portfolio. 5. Graphically show the Efficient Frontier, Sharpe's Capital Market Line (CML), Portfolio M, a Borrowing Portfolio and a Lending Portfolio. Also indicate where a timid risk averse investor would select a portfolio. Be certain to label all relevant variables and parts of your graph. 6. In 5. above explain what we mean by Portfolio M, explain also a Borrowing Portfolio and a Lending Portfolio. 7. How does Portfolio M relate in MPT (Modern Portfolio Theory)? 8. Explain the Investment Decision versus the Financing Decision for the investor. 9. More than 50 years have passed since the initial work was presented by Harry Markowitz, the Father of Modern Portfolio Theory. Markowitz developed the concept of the Efficient Frontier and more importantly this led to the later work by Wm. Sharpe on the Capital Market Line (CML)
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