What is indifference curve in portfolio theory?
Indifference Curve is a term used in portfolio theory to describe investor demand for portfolios based on the trade-off between expected return and risk. It is a convex curve, meaning upward curving and where it meets the Efficient Frontier there is a match between supply and demand.
How are utility curves helpful in finding out the efficient portfolio?
The utility of these risk-indifference curves is that they allow the selection of the optimum portfolio out of all those that are attainable by combining these curves with the efficient frontier.
What is indifference curve with respect to portfolio security selection?
The indifference curve is a graphical representation of the utility of an investment. An indifference curve plots various combinations of risk-return pairs that an investor would accept to maintain a given level of utility.
What is risk/return indifference curve?
An indifference curve is a plot of all risk-return combinations that give the investor the same level of utility. Each indifference curve represents a particular level of utility.
When can we consider a portfolio as an efficient portfolio?
Enter the efficient frontier. For every level of return, there is one portfolio that offers the lowest possible risk, and for every level of risk, there is a portfolio that offers the highest return. These combinations can be plotted on a graph, and the resulting line is the efficient frontier.
What are the objectives of portfolio theory?
The objectives of portfolio management are as follows: Creating wealth through capital appreciation. Protecting your earnings from market volatility. Maximizing returns on investment (ROI)
What is the utility curve in portfolio management?
Utility and Indifference Curves Utility is a measure of relative satisfaction that an investor derives from different portfolios. We can generate a mathematical function to represent this utility that is a function of the portfolio expected return, the portfolio variance and a measure of risk aversion. U = E(r) – ½Aσ2.
What is mean-variance framework?
Mean-variance analysis is a tool used by investors to weigh investment decisions. The analysis helps investors determine the biggest reward at a given level of risk or the least risk at a given level of return. The variance shows how spread out the returns of a specific security are on a daily or weekly basis.