Suppose that two portfolio managers who work for competing investment management houses each employ a group of security analysts to prepare the input list (i.e. list of securities with forecast standard deviations and covariances of their returns) for the Markowitz portfolio optimization algorithm. When all is completed, it turns out that the efficient frontier obtained by portfolio manager A dominates that of manager B. By dominate, we mean that A's optimal risky portfolio lies northwest of B's. Hence, given a choice, investors will all prefer the risky portfolio that lies on the Capital Allocation Line (CAL) of A.

i) What should be made of this outcome?

ii) Should it be attributed to better security analysis by A's analysts?

iii) Could it be that A's computer program is superior?

iv) If you were advising clients (and had an advance glimpse at the efficient frontiers of various managers), would you tell them to periodically switch their money to the manager with the most north-westerly portfolio?

Answer rating: 100% (QA)

i The outcome indicates that A s investment management is more effective than B s ... View the full answer