1. PORTFOLIO SELECTION (Page no:177)By Abila Antony

2. PORTFOLIO SELECTION Goal: finding the optimal portfolio OPTIMAL PORTFOLIO: Portfolio thatprovides the highest return and lowest risk. Method of portfolio selection: Markowitzmodel 3. Feasible set of portfolio Also known as portfolio opportunity set. With a limited no of securities an investorcan create a very large no of portfolios by combining theses securities in different proportions. 4. EFFICIENT PORTFOLIO Pageno:17 Portfolio no Expected return8 Standard deviation15.64.52 3 4 5 6 7 8 97.8 9.2 10.5 11.7 12.4 13.5 13.5 15.75.8 7.6 8.1 8.1 9.3 9.5 11.3 12.71016.812.9 5. Compare 4 & 5 which have same standard deviation Pf noExpect Standard ed deviation return15.64.527.85.839.27.64 510.58.111.78.1612.49.3713.59.5 Higherreturn?? Pf no.5 gives higher expected return which is more efficient portfolio 6. Compare 7 & 8 which have same Expected return Pf noExpected returnStandard deviation15.64.527.85.839.27.6410.58.1511.78.1612.49.37 813.5 13.59.5 11.3915.712.71016.812.9 Lower standarddeviation?? Pf no.7 which is more efficient portfolio 7. CRITERIA: EFFICIENT PROTFOLIO?? Given 2 portfolio with the same expectedreturn, the investor would prefer the one with the lower risk. Given 2 portfolio with the same risk, theinvestor would prefer the one with the higher expected return. 8. GRAPH Expected returnYBF F E C XDStandard deviation (risk) 9. Consider E & F GRAPHboth have same return but E has less risk then portfolio E would be preferredExpected returnYF F E XStandard deviation (risk) 10. GRAPH Expected return Now consider C & E BYE C XStandard deviation (risk)both have same risk but portfolio E offer more return then portfolio E would F preferred. 11. GRAPH Expected return Consider C& A bothhave same return but C has less risk then portfolio C would be preferredBYF C XStandard deviation (risk) 12. ResultEFCESame return but E has less risk than F Same risk But E offer more returnE has preferredE has preferredCASame return But C has less riskC has preferredABSame level of risk ButB has preferredC has minimum risk & B has Maximum risk Based on these we drawing efficient frontier. 13. Portfolio C has the lowest risk compared to all other portfolios. Here portfolio C represents the global minimum variance portfolio.GRAPH Expected returnYBF F E XC DStandard deviation (risk) 14. GRAPH EFFICIENT FRONTIERExpected returnYBF F E C XDStandard deviation (risk) 15. BC It contain all theefficient portfolio. Lying between the global minimum variance portfolio (risk) & the maximum return.