Determine the minimum variance portfolio always an efficient portfolio? Is an efficient portfolio always the minimum variance portfolio?
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Determine the minimum variance portfolio always an efficient portfolio? Is an efficient portfolio always the minimum variance portfolio?
The minimum variance portfolio is a portfolio of individually risky assets that, when taken together, result in the lowest possible risk level for the rate of expected return. These types of portfolios hedge each investment with an offsetting investment. In these portfolios volatility (stability of an investment; how much and how fast an investment changes) is used to replace risk, and less variance in volatility correlates with to less risk in investment.
An efficient portfolio offers the greatest level of return for the level of risk willing to be taken, or the lowest risk for an expected return.
I do not think the minimum variance portfolio is always the most efficient portfolio. The MVP does offer the lowest possible risk for the expected rate of return, but it uses the riskiest assets to obtain this level of expected returns. Efficient portfolios offer the expected returns with the lowest risk. While MVP’s hedge the risk of these riskier assets they still carry more risk than an efficient portfolio would carry. While MVP’s may be efficient portfolios they still carry more risk and do not offer the least amount of risk and therefore I do think they are always the most efficient.
Reference:
http://financial-dictionary.thefreedictionary.com/Minimum-variance+portfolio
