A portfolio management organisation analyses 200 stocks and constructs a mean- variance efficient portfolio using only 150 out of those 200 securities. (i) how many estimates of expected returns, variances and covariances are needed to optimise this portfolio? (ii) If one could safely assume that stock market returns closely resemble a single-index structure, how many estimates would be needed? In light of your answer to the above questions, discuss the advantages and disadvantages of the index model compared to the Markowitz procedure for obtaining an efficient diversified portfolio.

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Portfolio Management

Portfolio management is the process by which an investor decides that how the person will invest in a variety of assets in order to get a desired return in the future. A portfolio means a pool of assets that includes securities, bonds, and other investment instruments which helps in risk minimization of the money that has been invested. In other words, it can be said that a portfolio means a combination of assets in which an investor decides to invest their money in order to get a lump sum return in the future or even a series of cash flow that the person is expecting at the end of their job life.