What does the Markowitz model propose regarding efficient portfolios?

What does the Markowitz model propose regarding efficient portfolios?

• A. They maximize risk for a given return
• B. They provide the smallest portfolio risk for a given level of expected return
• C. They have the highest number of securities
• D. They are always low-risk investments

Answer: (B)

The Markowitz model, also known as Modern Portfolio Theory, proposes that efficient portfolios are designed to provide the smallest level of risk for a given level of expected return. This concept is grounded in the idea of diversification, where the combination of various securities can reduce the overall portfolio risk. In the model, an efficient portfolio is one that lies on the efficient frontier, representing a set of optimal portfolios that offer the highest expected return for a specific level of risk or the lowest risk for a given expected return. By optimizing the asset allocation within a portfolio based on expected returns and the correlation between asset returns, investors can achieve a more favorable risk-return trade-off. The other options do not accurately capture the essence of the Markowitz model. For instance, portfolios are not primarily assessed based on the number of securities or being low-risk by definition; rather, efficiency pertains to how well they balance risk and return through strategic diversification.

The Markowitz model, also known as Modern Portfolio Theory, proposes that efficient portfolios are designed to provide the smallest level of risk for a given level of expected return. This concept is grounded in the idea of diversification, where the combination of various securities can reduce the overall portfolio risk.

In the model, an efficient portfolio is one that lies on the efficient frontier, representing a set of optimal portfolios that offer the highest expected return for a specific level of risk or the lowest risk for a given expected return. By optimizing the asset allocation within a portfolio based on expected returns and the correlation between asset returns, investors can achieve a more favorable risk-return trade-off.

The other options do not accurately capture the essence of the Markowitz model. For instance, portfolios are not primarily assessed based on the number of securities or being low-risk by definition; rather, efficiency pertains to how well they balance risk and return through strategic diversification.