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Posted: October 21st, 2020
Determine the minimum variance portfolio always an efficient portfolio? Is an efficient portfolio always the minimum variance portfolio?
Question description
Need a response to post below ...a paragraph Determine the
minimum variance portfolio always an efficient portfolio? Is an efficient
portfolio always the minimum variance portfolio?
The minimum
variance portfolio is a portfolio of individually risky assets that, when taken
together, result in the lowest possible risk level for the rate of expected
return. These types of portfolios hedge each investment with an offsetting
investment. In these portfolios volatility (stability of an investment; how much
and how fast an investment changes) is used to replace risk, and less variance
in volatility correlates with to less risk in investment.
An
efficient portfolio offers the greatest level of return for the level of risk
willing to be taken, or the lowest risk for an expected return.
I do not
think the minimum variance portfolio is always the most efficient portfolio. The
MVP does offer the lowest possible risk for the expected rate of return, but it
uses the riskiest assets to obtain this level of expected returns. Efficient
portfolios offer the expected returns with the lowest risk. While MVP’s hedge
the risk of these riskier assets they still carry more risk than an efficient
portfolio would carry. While MVP’s may be efficient portfolios they still carry
more risk and do not offer the least amount of risk and therefore I do think
they are always the most efficient.
Reference:
http://financial-dictionary.thefreedictionary.com/Minimum-variance+portfolio
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