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Report 1

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This report utilises Markowitz’s modern portfolio theory (MPT) in the mean-variance optimisation of investor portfolios.

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Report 1
Topics this document covers:
Financial risk Mathematical finance Financial economics Utility Decision theory Portfolio optimization Modern portfolio theory Risk aversion Diversification Hyperbolic absolute risk aversion Marginal conditional stochastic dominance Expected utility hypothesis
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Topics this document covers:
Financial risk Mathematical finance Financial economics Utility Decision theory Portfolio optimization Modern portfolio theory Risk aversion Diversification Hyperbolic absolute risk aversion Marginal conditional stochastic dominance Expected utility hypothesis
Sample Text:
MPT assumes that investors can make decisions based on Gaussian-like parameters of mean and variance (Markowitz 1991). Additionally, it assumes the divergent of risk into idiosyncratic and systematic risk; the former which can be minimised by appropriate diversification. The monthly log returns of five industry indexes are along with a number of constraints. Short selling is not actionable and exposure to individual indexes are limited to 50%. Additionally, the risk free rate cannot be attained; thus, a CAL line cannot be used to maximise investor utility. Portfolio Weights ________________ Firstly, the financial index dominates the value-weighted portfolio (VWP) while having no presence in the minimum variance portfolio (MVP) and maximum Sharpe portfolio (MSP). The designation of weights in a VWP is determined by market capitalisation...
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