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Unformatted text preview: Capital Market Line Here we examine all possible CAL's based on the Markowitz efficient frontier and identify the optimal risky portfolio (P*). This gives us the optimal CAL*. CAL and the Optimal Risky Portfolio E(R P ) lending borrowing CAL* ("new" efficient frontier) Markowitz Efficient Frontier ("old") P* • P* has the greatest rewardtorisk r RF ratio on the Markowitz EF σ P (1) All investors hold (in various proportions) exactly the same risky portfolio P*. (2) The risky portfolio must include all risky assets . If there was a risky asset not in the portfolio, demand is zero so it would not exist. (3) All assets in the portfolio are held in proportion to their market value . If an asset's proportion > its market value, this indicates there is excess demand for this asset. Its price will therefore increase until the market value is consistent with its proportion (weight) in the optimal portfolio....
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This note was uploaded on 10/18/2009 for the course UGBA 133 taught by Professor Distad during the Spring '08 term at University of California, Berkeley.
 Spring '08
 DISTAD

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