Slides22-2010 - Derivation of the Expected Value-Variance...

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Unformatted text preview: Derivation of the Expected Value-Variance Frontier with a Risk-Free Asset: Lecture XXII Charles B. Moss October 14, 2010 Charles B. Moss () Ecient Frontier with Risk-free Asset October 14, 2010 1 / 12 1 Introduction of a Risk-free Asset Mechanics 2 Capital Market Line Charles B. Moss () Ecient Frontier with Risk-free Asset October 14, 2010 2 / 12 Introduction of a Risk-free Asset If a risk-free asset is introduced into the portfolio, the ecient set of portfolios becomes a straight line between the risk-free asset and a tangency on the ES frontier as depicted in Figure 1. Charles B. Moss () Ecient Frontier with Risk-free Asset October 14, 2010 3 / 12 [ ] E r f r Figure: Ecient Expected Value-Standard Deviation Frontier with a Risk-Free Asset Charles B. Moss () Ecient Frontier with Risk-free Asset October 14, 2010 4 / 12 Mechanics Setting up the portfolio problem min w 1 2 w w s . t . ( z R 1) w = R (1) Forming the Lagrangian L = 1 2 w w (...
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This note was uploaded on 07/15/2011 for the course AEB 6182 taught by Professor Weldon during the Fall '08 term at University of Florida.

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Slides22-2010 - Derivation of the Expected Value-Variance...

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