Model Assessment
Our model allows the investor to take into account considerations of both risk
and return. It also has the capability to incorporate as many securities and risk
factors as processing power will allow. Sensitivity analysis provided by the
model also shows the user how much the desired return, desired risk, and
estimates of risk factors can change without having an effect on which securities
to invest in. This would be useful if an investor wanted to see how different
market wide inflation rates would affect the choice of an optimal portfolio.
Our model is limited as it does not allow a user to evaluate portfolios with
predetermined levels of both risk and return at the same time. Also, our model
does not incorporate short selling, tax effects, or transaction costs.
When tax effects are similar across securities the model is useful to large
investors whose transaction costs are minimal. However, the model is not useful
to small investors who face high transaction costs.
Previous: Advanced Model
Next: Avenues of Future Study
Return to Table of
Contents
Last Updated November 19, 1997 by Chris Payton