QUESTIONS
1.
a. What is “utility” in an economic sense?
b. How do indifference curves express the utility function of a person?
c. What does it mean that an investor is risk-averse?
2.
a. How is the expected return of a portfolio calculated from the expected returns of the assets?
b. What other information is needed for this calculation?
3.
a. Why are covariances (or correlations) important in selecting a portfolio?
b. How do they impact diversification and portfolio risk?
4.
a. What is the feasible set of portfolios?
b. What are the important subsets of a feasible set?
c. How does one determine the optimal portfolio for an investor?
5. What method can be used as an approximation to the full covariance structure of a group of assets?
6.
a. What approach is generally used to determine the critical inputs used in the Markowitz model?
b. What are some problems with this approach?
c. How can robust portfolio optimization be used in portfolio construction?
7.
a. What are some reasons for constraining the allocation of certain assets in a portfolio?
b. What is the cost of such constraints?
8. What do empirical studies suggest about the probability distribution of asset returns?
9.
a. What is the Value-at-Risk measure?
b. What are limitations of the Value-at-Risk measure?
c. What is the conditional Value-at-Risk measure and why is it superior to the Value-at-Risk measure?
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