5Portfolio Optimization
5.1 Maximizing Profit, Minimizing Risk
A fund manager’s task is to achieve two objectives: to maximize profit but at the same time minimize risk. In general, assets that give a higher return bear a higher risk. Government bonds are relatively safe because governments seldom go bankrupt (that happens occasionally). However, the interest that a government bond pays is generally lower than the return on stocks.
The best that a fund manager could do is to base their judgement on their knowledge about the assets available for investment. In other words, they can only do their best to find the expected return and risk for each asset. If their assessments are wrong, then they will make wrong ...
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