What is a super-efficient portfolio?

What is a super-efficient portfolio?

Exhibit 1: The capital market line is the tangent line to the efficient frontier that passes through the risk-free rate on the expected return axis. The point of tangency corresponds to a portfolio on the efficient frontier. That portfolio is called the super-efficient portfolio.

How did Tobin extend Markowitz portfolio theory?

James Tobin (1958) expanded on Markowitz’s work by adding a risk-free asset to the analysis. This made it possible to leverage or deleverage portfolios on the efficient frontier. This lead to the notions of a super-efficient portfolio and the capital market line.

Is the market portfolio an efficient portfolio?

CML differs from the more popular efficient frontier in that it includes risk-free investments. The intercept point of CML and efficient frontier would result in the most efficient portfolio, called the tangency portfolio. The tangency point is the optimal portfolio of risky assets, known as the market portfolio.

Is the market portfolio the most efficient?

Regardless of the number of stocks in the universe, the market portfolio is never MV efficient. Similar results are found for equally-weighted portfolios (see Table 4).

Why is the market portfolio not efficient?

The market portfolio can be inefficient only if a significant number of investors either do not have rational expectations or care about aspects of their portfolios other than expected return and volatility. Investors could also herd—actively trying to follow each other’s behavior.

What is the goal of an efficient portfolio?

The main objective of modern portfolio theory is to have an efficient portfolio, which is a portfolio that yields the highest return for a specific risk, or, stated in another way, the lowest risk for a given return.

What is Markowitz portfolio model?

Markowitz model is thus a theoretical framework for analysis of risk and return and their inter-relationships. He used the statistical analysis for measurement of risk and mathematical programming for selection of assets in a portfolio in an efficient manner. His framework led to the concept of efficient portfolios.

What does Markowitz portfolio theory suggest?

Markowitz theorized that investors could design a portfolio to maximize returns by accepting a quantifiable amount of risk. In other words, investors could reduce risk by diversifying their assets and asset allocation of their investments using a quantitative method.

How do you determine if a portfolio is efficient?

An efficient frontier is a set of investment portfolios that are expected to provide the highest returns at a given level of risk. A portfolio is said to be efficient if there is no other portfolio that offers higher returns for a lower or equal amount of risk.

What makes a diversified portfolio efficient?

A reliable, or effective portfolio, is one that has a varying degree of likely return and uncertainty. Efficient diversification simply comes down to having a portfolio of securities that contains a variety of different companies or options so that the investment portfolio is well-rounded.

Which portfolio is efficient?

A portfolio is said to be efficient if there is no other portfolio that offers higher returns for a lower or equal amount of risk. Where portfolios are located on the efficient frontier depends on the investor’s degree of risk tolerance. The efficient frontier is a curved line.

What are the characteristics of an efficient portfolio?

A good portfolio is always:

• Risk averse. Your portfolio should not expose you to any more risk than is necessary to meet your objectives.
• Cost efficient. A good portfolio achieves its objectives at the lowest possible cost.
• Risk efficient.
• Tax efficient.
• Simple.
• Transparent.
• Easy to manage.

How did James Tobin contribute to portfolio theory?

James Tobin ( 1958) expanded on Markowitz’s work by adding a risk-free asset to the analysis. This made it possible to leverage or deleverage portfolios on the efficient frontier. This lead to the notions of a super-efficient portfolio and the capital market line.

Is there such a thing as a super efficient portfolio?

In 1958, Nobel economist James Tobin discovered that while there are many portfolios out there in portfolioland, there is only one super-efficient portfolio that cannot be improved upon. It sits on a knife edge where any change you make is a change for the worse, delivering poorer returns for more risk. In 1964, the other shoe dropped.

What should the expected return be on Tobin’s portfolio?

Following Tobin we can assume that the expected capital gain is zero. This is because the individual investor expects capital gains and losses to be equally likely. The best expectation of the return on bonds is simply the prevailing market rate of interest (r). But this is just the expected return on bonds.

How is Tobin’s theory of money as an asset explained?

Tobin argues that money as an asset is demanded as an aversion to risk. Tobin’s theory is explained in Fig. 19.4. On the vertical axis of the upper quadrant we measure the expected return to the portfolio; on the horizontal axis we measure the riski­ness of the portfolio.