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Revisiting modern portfolio theory

Paulo Sérgio Tenani

No 419, Textos para discussão from FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil)

Abstract: This paper revisits Modern Portfolio Theory and derives eleven properties of Efficient Allocations and Portfolios in the presence of leverage. With different degrees of leverage, an Efficient Portfolio is a linear combination of two portfolios that lie in different efficient frontiers - which allows for an attractive reinterpretation of the Separation Theorem. In particular a change in the investor risk-return preferences will leave the allocation between the Minimum Risk and Risk Portfolios completely unaltered - but will change the magnitudes of the tactical risk allocations within the Risk Portfolio. The paper also discusses the role of diversification in an Efficient Portfolio, emphasizing its more tactical, rather than strategic character

Date: 2016-05-30
New Economics Papers: this item is included in nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:fgv:eesptd:419

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