A central assumption made in Mean-Variance Analysis and the Capital Assignment - 2

A central assumption made in Mean-Variance Analysis and the Capital Asset Pricing ensample (CAPM) is that investors prefer to invest in the most efficient portfolios available - Assignment ExampleAn efficient portfolio is a collection of investments that provide the laid-backest evaluate knuckle under at the given level of risk or portfolio that yield the lowest risk at given expected a return. Expected return is the minimum return expected by investors investing in any given asset. The risk occurs imputable to deviation from the expected return in either case as explained by Markowitz. According to Markowitz Portfolio Theory, individuals who accept to take high return with high-risk cannon diversify further without acceptance of greater risk. On the other hand, individuals leave not agree to reduce their return without reduction of risk. This fact explains why low-risk, low-return and high-risk, high-return portfolios are equivalent when it comes to investing. Markowitz (1952 7 7) believes that portfolio choice is dependent on maximum discounted risk gamble which will give a high return since the future is uncertain and assurance of money back on investment should be assured.The low-risk, low-return investors motivated by low risk in an asset they are investing in will invest more getting quantifiable income. On the other hand, high risk high return individuals will tend to invest in minimal assets with high risk, but getting a quantifiable return due to their nature of the high return. As argued by Markowitz (1952, p, 77) investors should not just go for high return high-risk investment rather they should focus on the expected return. An investor may go for high-risk, high return bonds, but in case of failure, the return will be greatly reduced. On the other hand, an investor may go for several low-risk, low-return, but the cumulative expected return will be high (hypothesis of the maxim by Markowitz 1952 78.).According to maxim hypothesis, both diversi fied and under-diversified call down will have the same cumulative expected return. In the United States, the under-diversified portfolio is greater among young people,