Under the Markowitz model, the risk of a portfolio is measured by the portfolio variance.

Question

BlackTom AI · Accepted Answer

The question asks about how the Markowitz framework defines portfolio risk and how it is quantified.
Option 1: True. Under the Markowitz mean-variance framework, risk is defined as the variance (or equivalently the standard deviation) of portfolio returns. This approach captures the dispersion of possible outcomes around the expected return and is central to the optimization process where one seeks to minimize variance for a given level of expected return or maximize return for a given risk.
Option 2: False. This would misstate the core idea of the Markowitz model. While investors may care about downside risk or other metrics, the canonical Markowitz formulation uses variance as the risk measure, not some alternative or exclusive focus on potential gains or single-sided considerations. Saying risk is not captured by variance overlooks the foundational mean-variance optimization.
Option 3: (Note: only two options were provided in this context, but if there were more, each would be evaluated similarly.) However, the key point remains that the standard Markowitz risk metric is variance (or standard deviation), not an alternate single-factor notion that ignores dispersion.
Option 4: (If applicable in extended interpretations) Any assertion that risk is defined by factors beyond variance in the classic Markowitz model would be introducing an extension (e.g., downside risk or higher moments) rather than the original risk measure used in the model, which centers on variance.

MGMT90280_2025_SM1 Sample Quiz for Individual Assignment

Under the Markowitz model, the risk of a portfolio is measured by the portfolio variance.

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