Markowitz Approach: Markowitz approach provides a systematic search for optimal portfolio. It enables the investors to locate minimum variance portfolios i.e. portfolios with the least amount of risk for different levels of expected return. It is the process of combining assets that are less than perfectly positively correlated in order to reduce portfolio risk without sacrificing portfolio returns. It is more analytical than simple diversification because it considers correlations between assets returns for lowering risk. There are computer based software available for determining the efficient portfolios. If we go through this process for different levels of expected returns, we can locate minimum variance portfolio. Application of the above package will tell us how much we can invest in each security to form an efficient portfolio for a given level of return.
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