Question: why can diversification eliminate some risk? why can it not eliminate all risk? what is the separation property and why does it apply? Contrast Markowitz

  1. why can diversification eliminate some risk? why can it not eliminate all risk?
  2. what is the separation property and why does it apply?
  3. Contrast Markowitz portfolio optimization with the full covariance matrix with Markowitz portfolio optimization with the index model.

a) Which steps are different? b) What are the advantages and disadvantages of using the index model? c)Which method should you choose?

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