1. Markowitz Portfolio Theory
Dr. Lokanandha Reddy Irala (

2. Probability distribution of returns
Finite Holding Period
Probability distribution of returns
Risk of an asset - Variability (SD) of expected returns.
Decisions - Based on the risk and return
Assumption of Non satiation
Investors prefer higher levels of terminal wealth to lower levels of terminal wealth – Given two portfolios with the same SD, the investor would choose the one with higher expected return
Dr. Lokanandha Reddy Irala (

3. Lokanandha Reddy Irala 3 Markowitz Portfolio Theory
MPT - The Assumptions
Finite Holding Period
Probability distribution of returns
Risk of an asset - Variability (SD) of expected returns.
Decisions - Based on the risk and return
Assumption of Non satiation
Investors prefer higher levels of terminal wealth to lower levels of terminal wealth – Given two portfolios with the same SD, the investor would choose the one with higher expected return
Lokanandha Reddy Irala Markowitz Portfolio Theory

4. Assumption of Risk aversion
Maximizing utility of wealth, but not wealth itself
No transaction costs and taxes while buying and selling the securities
Investments are infinitely divisible.
Dr. Lokanandha Reddy Irala (

5. MPT - The Feasible /Opportunity Set
All the portfolios that could be formed from a given numbers of securities RP Rb B Rc C Rd E D A Ra p a e d b
Lokanandha Reddy Irala Markowitz Portfolio Theory

6. MPT - The Feasible /Opportunity SetRP Rb B Rc C
Sub Optimal ??!! Rd E D A Ra
Principle of Dominance – Efficient portfolios
Efficient Frontier p a e d b
Lokanandha Reddy Irala Markowitz Portfolio Theory

7. MPT - The Optimal portfolio
Which is the optimal portfolio for me ?
A , E, C or B ? RP Rb B Rc C Rd E D A Ra
Selection of optimal portfolio
– Indifference Curves p a e d b
Lokanandha Reddy Irala Markowitz Portfolio Theory

8. MPT - The Indifference CurveRP C1 Rr R Rq Q Rp P p p q r
Lokanandha Reddy Irala Markowitz Portfolio Theory

9. MPT - The Indifference Map
A set of Indifference curves represent the Indifference map of an Investor
The steepness of the curve is dependent upon the degree of risk aversion of the investor
The higher the risk aversion, the steeper is the curve RP C3 C2 C1 p
Lokanandha Reddy Irala Markowitz Portfolio Theory

10. MPT – The Optimal Portfolio
Which is the optimal portfolio for me ?
A , E, C or B ? C3 RP
Optimal portfolio C2 C1 Rb B Rc C Rd E D A Ra p a e d b
Lokanandha Reddy Irala Markowitz Portfolio Theory

11. MPT- The Concavity Of The Efficient Set1 2 3 6 4 5 7 8 9 10 Q S
Portfolio S (3, 6+) efficient than R (when  = < +1) T R
Portfolio R (3,6) with equal invest. in P and Q when  = +1 P
Portfolio T (3-, 6) efficient than R (when  = < +1)
Lokanandha Reddy Irala Markowitz Portfolio Theory

12. Markowitz Portfolio Theory
Thank You
Questions?
Lokanandha Reddy Irala Markowitz Portfolio Theory