Question

Explain the Efficient Frontier of Risky Assets, Choosing the Optimal Risky Portfolio, and the Preferred Complete Portfolio and a Separation Property.

Answer 1

Efficient Frontier is a set of optimal portfolio that will be offering highest expected return for a predefined level of risk. it can also be defined as the lowest possible risk for predefined level of expected return.

when we will be selecting the portfolio based upon the efficient Frontier than portfolio that will be lying below the efficient Frontier are suboptimal and Portfolio which are lying above the efficient Frontier are optimal so they will be providing adequate return.

Choosing the optimal risky portfolio is generally done on the middle of the curve and if one go higher up the curve it will mean that they are taking more risk proportionately for achieving lower incremental return so one will have to be at the lower end of the curve in order to maintain the optimal portfolio in order to make highest return portfolio.

Preferred complete portfolio would be a Portfolio which will be yielding with maximum rate of return & minimum rate of risk and these will be done on allocating them on the efficient Frontier and they will be lying above the efficient Frontier because they are providing with the highest expected rate of return for a lower level of risk.

Separation property is a important element in the overall portfolio theory which has been described by Harry markowitz that gives a portfolio manager the ability to separate the process of satisfying client asset into two different part . the first part will be optimal risky portfolio and this portfolio is same for all the client wherever other part is specific in nature and it is related to the specific client inin order to maximize his return and minimize his risk.