The correct answer is: A. lack of accuracy.
The Markowitz model is a portfolio optimization model that was developed in the 1950s by Harry Markowitz. The model is based on the idea that investors should seek to maximize their expected return while minimizing their risk. The model does this by creating a portfolio of assets that has the lowest possible variance, given a certain level of expected return.
While the Markowitz model is a valuable tool for portfolio optimization, it has some limitations. One limitation is that the model assumes that investors have perfect information about the future. This is obviously not the case, as there is always some uncertainty about future returns. As a result, the Markowitz model may not always produce the optimal portfolio for a given investor.
Another limitation of the Markowitz model is that it is based on the assumption that returns are normally distributed. This is also not always the case, as returns can sometimes be skewed or leptokurtic. As a result, the Markowitz model may not always be accurate in predicting future returns.
Despite its limitations, the Markowitz model is a valuable tool for portfolio optimization. It can help investors to create a portfolio that is both diversified and has the potential to generate high returns.
Here is a brief explanation of each option:
- A. Lack of accuracy. The Markowitz model is based on the assumption that investors have perfect information about the future. This is obviously not the case, as there is always some uncertainty about future returns. As a result, the Markowitz model may not always produce the optimal portfolio for a given investor.
- B. Predictability flaws. The Markowitz model is based on the assumption that returns are normally distributed. This is also not always the case, as returns can sometimes be skewed or leptokurtic. As a result, the Markowitz model may not always be accurate in predicting future returns.
- C. Complexity. The Markowitz model is a complex model that can be difficult to understand and use. This can be a barrier for some investors who may not have the time or resources to learn how to use the model.
- D. Inability to handle large number of inputs. The Markowitz model can be computationally intensive, and it can be difficult to use the model with a large number of assets. This can be a limitation for investors who have a large portfolio of assets.