¶ … Restricted Frontier
The Unrestricted Frontier
The Individual of Five Assets, Equally Weighted Portfolio, Efficient Frontier and CAL
Did you observe any differences between the restricted and unrestricted efficient frontier developed using your portfolio? Why?
Using my portfolio, I did observe differences between the restricted and unrestricted efficient frontier. For example, the restricted frontier has been pulled up on the chart and greatly affected by Australian bonds, as well as the accessibility of cash, to a point where the curve appears to be unequal. This means that the unrestricted efficient frontier, affected by bank accepted-bills, is not "pulling its equal weight," so to speak (Bodi 2011). This means that there is an imbalance in the economic performance of cash flow in New Zealand. Given the current economic situations, this is not necessarily a surprise, and more of an expectations. I would assume that as the economy begins to even out, so will the equality of the curve on my graph. However, the curve is currently uneven, which can be seen as reflection of the uneven state of the economy.
Using your graph, discuss the concept of the Markowitz Portfolio Theory and the CAPM. Clearly show that using a risk-free asset, you are able to obtain a higher return for a given risk.
(a) Describe each of the asset classes, setting out their characteristics and risks.
According to the Markowitz Portfolio Theory, we will see a pull between AM and GM measures as well as the restricted and unrestricted frontier. There will be a push-pull scenario in both situations. Therefore, the characteristics and risks present in the concepts graphed above are highly affected by the economy. For instance, the portfolio developed reflects on Australian and International bonds, cash in the economy, property values, and bank-accepted bills. Obviously, the economic situation affects each of these concepts, and the reflection can be seen in the graph plotted below. There is a general relationship between these two concepts and they work in an intertwined relationship.
b. Graph
GM Yield
Bonds Property Australian shares International shares
1983
4.9
15.67
1.7
1 / 5
1984
3.8
22.45%
1.2
1.2
1985
3.2
15.79%
.6
.6
1986
2.3
15.13%
.9
.9
1987
1.9
17.39%
1.2
1.2
1988
1.8
1.4
1.4
1989
2
11.11%
2.2
2
1990
2
1.1
1.2
1991
2
1.4
.6
1992
2.6
.9
.9
1993
2.5
2.3
2.2
1994
2.3
1.1
1.2
1995
2.3
1.2
.6
1996
2.6
1.9
.9
1997
2.8
2
1.2
1998
2.9
1.4
1.4
1999
3.1
1.8
1.1
2000
3.6
1.1
1.2
2001
4.2
1.1
1.2
It is difficult to get a solid result from the usage of the efficient frontier only, especially with the current economic trends. This has become more apparent to me by plotting the actual graphs. I expect that I would not get a complete and accurate result by plotting a graph using the efficient frontier only. It is important, therefore, to plot other information, as completed above, to get more accurate and reliable results. This does not meen that the efficient frontier cannot provide decent or useful information; it just needs to be used for specific points and purposes.
(d) How does foreign exchange risk contribute to the risk of international investments? Is it worthwhile to hedge exchange rate risk?
The foreign exchange risk, reflected in my graphs above with the international concepts taken into consideration, contributes to the risk of the overall economic issues present at hand. The international economy is so globalized that if one major producing country has a problem with production and output, it can affect all of the world. It certainly affects other countries. Therefore, international investments are not necessarily secure, simply because of this factor. It is worthwhile, as a result, to hedge exchange risk rates because these rates can give us an estimate of whether or not it is wise to invest internationally. Anything that can give one some kind of prediction or helpful comment in this economy is always good. An estimate or prediction can assist one with making future decisions and figuring out whether or not it is useful to proceed with different decisions and concepts.
(e) During a world…
