2. INVESTMENT in single security is always risky. A rational investor always
expects highest returns at less risk. It is possible when an investor
diversify his/her investment through creating a portfolio. The idea behind
creating portfolio is, “keeping all eggs in different basket is safer than
keeping all eggs in single basket”. Creating a portfolio is a strategy to
escape risk and achieving investor’s objective. Markowitz model is
concerned with creating an optimal portfolio using efficient frontier by
risk averse investors.
3. Markowitz model involves three phase to find out optimum portfolio. They are:
1. Determining feasible set of portfolio.
2. Determining efficient portfolio.
3. Arriving at optimum portfolio.
4. Dominance Principle:
He used dominance principle to select optimum portfolio. According to this
principle dominant portfolio is either the portfolio which maximise the returns at
the given level of risk or the portfolio should minimise the risk at a given level of
return.
This principle is based on the assumption that, investors are rational and also risk
averse.
5.
6.
7. Formulas used:
1. Return of the stock (ri) = LN(latest price/previous price)*100
2. Return of the Portfolio
3. Risk of two stock portfolio Variance
8. 5. Risk of a portfolio with more than two stocks:
4. Utility
Utility = E(Rp) - (Risk squared/Risk Tolerance)
