The daily price change of an average stock is approximately [[normally distributed|Normal distribution]]. Based on this given, [[Harry Markowitz|http://en.wikipedia.org/wiki/Harry_Markowitz]] developed //''Portfolio Theory''// (heavily criticized by Taleb in [[The Black Swan: The Impact of the Highly Improbable]]). The basics of portfolio theory is that you can minimize the risk of an investment by spreading the investment over multiple securities. If you select multiple projects and plot risk and return in the same graph:

<<image /static/files/MBI/Module%2012/mckenna_fig1.jpg width:500>>

You want to move 'up' for better returns and 'left' for lower risk. The left/top most line denotes the portfolio mix which maximizes return for the lowest risk. Any portfolio along this line is called an //''efficient portfolio''//.
bag
finance_public
created
Tue, 01 Feb 2011 20:36:52 GMT
creator
dirkjan
modified
Tue, 01 Feb 2011 20:36:52 GMT
modifier
dirkjan
tags
M12
Principles of Corporate Finance
Term
creator
dirkjan