Mean-variance Analysis

Mean-variance Analysis

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“How do we measure ‘risk’ in a portfolio of risky assets? Discuss the validity of the assumptions of Mean Variance Analysis and illustrate your work with reference to an equity index.”

Markowitz once quoted from Shakespeare’s ‘Merchant of Venice’ and stated, “Clearly, Shakespeare not only knew about diversification but, at an intuitive level, understood covariance”. Markowitz aim was to assign numbers to an investor’s intuition to produce a consistent formula for portfolio building (Fox, 2009).