Under MPT (Modern Portfolio Theory), what do the risk-free rate and the optimal risky portfolio create...

Under MPT (Modern Portfolio Theory), what do the risk-free rate and the optimal risky portfolio create and why is it special to all other possible portfolios (with the exception of the optimal risky portfolio?

Expert Solution

Modern portfolio theory is designed by Harry markowitz with focusing upon maximization of Return and minimization of risk and it is not about achieving the desired rate of return for a given level of risk so risk free rate and optimal portfolio are highly specific in nature for various investors because this is risk based method in which investor can create his portfolio according to his need and that portfolio will be minimised with the risk according to the modern portfolio theory and it will have the potential of maximization of the return.

Risk free and optimal risky portfolio are creating combination of all such stocks which are providing investors with maximum rate of return and minimum risk so modern portfolio theory as assuming that all investors are mostly risk-averse in nature they will be trying to maximize their rate of return and minimise their level of risk.

It is special to all other portfolios because it is trying to lower the overall risk associated with the investment in the portfolio by curtailment of unsystematic risk and it is also trying to maximize the rate of return by investing into best combination of assets which will provide them with maximum return and lower and hence it is is special to all other portfolio because it believes that investors are not completely diversified & they need to be diversified.

jeff jeffy answered 2 years ago

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