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Markowitz efficient frontier

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Definition of Markowitz efficient frontier

Markowitz Efficient Frontier Image 1

Markowitz efficient frontier

The graphical depiction of the markowitz efficient set of portfolios
representing the boundary of the set of feasible portfolios that have the maximum return for a given level of
risk. Any portfolios above the frontier cannot be achieved. Any below the frontier are dominated by
markowitz efficient portfolios.



Related Terms:

Markowitz efficient set of portfolios

The collection of all efficient portfolios, graphically referred to as the
markowitz efficient frontier.


Beta coefficient

A measurement of the extent to which the returns on a given stock move with stock market.


coefficient of correlation

a measure of dispersion that indicates the degree of relative association existing between two variables


Coefficient of determination

A measure of the goodness of fit of the relationship between the dependent and
independent variables in a regression analysis; for instance, the percentage of variation in the return of an
asset explained by the market portfolio return.


coefficient of determination

a measure of dispersion that
indicates the “goodness of fit” of the actual observations
to the least squares regression line; indicates what proportion
of the total variation in y is explained by the regression model



coefficient of variation

a measure of risk used when the standard deviations for multiple projects are approximately
the same but the expected values are significantly different


Correlation coefficient

A standardized statistical measure of the dependence of two random variables,
defined as the covariance divided by the standard deviations of two variables.


Markowitz Efficient Frontier Image 2

Correlation Coefficient

A measure of the tendency of two variables to change values
together


Correlation coefficient

A statistic in which the covariance is scaled to a
value between minus one (perfect negative correlation) and plus one (perfect
positive correlation).


Efficient capital market

A market in which new information is very quickly reflected accurately in share
prices.


efficient capital markets

Financial markets in which security prices rapidly reflect all relevant information about asset values.


Efficient diversification

The organizing principle of modern portfolio theory, which maintains that any riskaverse
investor will search for the highest expected return for any level of portfolio risk.


Efficient frontier

The combinations of securities portfolios that maximize expected return for any level of
expected risk, or that minimizes expected risk for any level of expected return.


Efficient frontier

A graph representing a set of portfolios that maximizes
expected return at each level of portfolio risk. See markowitz model.


Efficient Market Hypothesis

In general the hypothesis states that all relevant information is fully and
immediately reflected in a security's market price thereby assuming that an investor will obtain an equilibrium
rate of return. In other words, an investor should not expect to earn an abnormal return (above the market
return) through either technical analysis or fundamental analysis. Three forms of efficient market hypothesis
exist: weak form (stock prices reflect all information of past prices), semi-strong form (stock prices reflect all
publicly available information) and strong form (stock prices reflect all relevant information including insider
information).


Efficient Markets Hypothesis

The hypothesis that securities are typically in equilibrium--that they are fairly priced in the sense that the price reflects all publicly available information on the security.


Markowitz Efficient Frontier Image 3

Efficient portfolio

A portfolio that provides the greatest expected return for a given level of risk (i.e. standard
deviation), or equivalently, the lowest risk for a given expected return.
efficient set Graph representing a set of portfolios that maximize expected return at each level of portfolio
risk.


Information Coefficient (IC)

The correlation between predicted and actual stock returns, sometimes used to
measure the value of a financial analyst. An IC of 1.0 indicates a perfect linear relationship between predicted
and actual returns, while an IC of 0.0 indicates no linear relationship.



input-output coefficient

a number (prefaced as a multiplier
to an unknown variable) that indicates the rate at which each
decision variable uses up (or depletes) the scarce resource


Internally efficient market

Operationally efficient market.


Markowitz diversification

A strategy that seeks to combine assets a portfolio with returns that are less than
perfectly positively correlated, in an effort to lower portfolio risk (variance) without sacrificing return.
Related: naive diversification


Markowitz efficient portfolio

Also called a mean-variance efficient portfolio, a portfolio that has the highest
expected return at a given level of risk.


Markowitz model

A model for selecting an optimum investment portfolio,
devised by H. M. markowitz. It uses a discrete-time, continuous-outcome
approach for modeling investment problems, often called the mean-variance
paradigm. See efficient frontier.


Mean-variance efficient portfolio

Related: markowitz efficient portfolio


Minimum-variance frontier

Graph of the lowest possible portfolio variance that is attainable for a given
portfolio expected return.


Operationally efficient market

Also called an internally efficient market, one in which investors can obtain
transactions services that reflect the true costs associated with furnishing those services.



 

 

 

 

 

 

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