Please answer the following questions:

1. Why do most investors hold diversified portfolios?

2. What is covariance, and why is it important in portfolio theory?

3. Why do most assets of the same type show positive covariances of returns with each other? Would you expect positive covariances of returns between different types of assets such as returns on Treasury bills, General Electric common stock, and commercial real estate? Why or why not?

4. What is the relationship between covariance and the correlation coefficient?

5. Explain the shape of the efficient frontier.

6. Draw a properly labeled graph of the Markowitz efficient frontier. Describe the efficient frontier in exact terms. Discuss the concept of dominant portfolios and show an example of one on your graph.

7. Assume you want to run a computer program to derive the efficient frontier for your feasible set of stocks. What information must you input into the program?