Question
The following is the answer of the question: ''One important assumption behind portfolio theory is that investors are mean- variance maximizers. What is the meaning
The following is the answer of the question: ''One important assumption behind portfolio theory is that investors are "mean- variance maximizers." What is the meaning of this? Explain why this assumption is important in the delineation of the efficient frontier.''
Help you please help me to rephrase the following answer with your own wording or design but retain the same meaning or even can add more detailed information for this question. Thank you so much!!! please answer asap!!~
The portfolio theory illustrated the relationship between the return (mean) and risk (variance). The portfolio used to analyze the inter-relationship of the risk and the return of a portfolio. As the portfolio may consist of different combinations of assets, for example, different percentages of holding bonds and equity. However, the portfolio theory noted that the level of risk and return between the assets is not a straight-line relationship and they are not linear. It is because of the diversification, which reduces the interactive risk of the assets in the portfolio and makes the variance of the portfolio decreased. And causing them to become uncorrelated as a result. Therefore, the graph bending towards the boundaries of the return. By adding an uncorrelated asset, it can reduce risk and increases the return to make it less bend. The efficient frontier is the set of portfolio supposes to generate the largest return for a required variance or expected degree of return with the lowest level of variance.
The assumption match with the efficient frontier as it is the optimal point at which level of risk is equated to a higher level of expected return. Mean and variance maximization means that the efficient frontier can be concluded below the capital allocation line.
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