Unformatted text preview: eory and the efficient frontier
Expected Return (%) Standard Deviation The solid line along the upper edge of this region is known as the efficient frontier. Combinations along
this line represent portfolios for which there is lowest risk for a given level of return. Conversely, for a
given amount of risk, the portfolio lying on the efficient frontier represents the combination offering the
best possible return. Thus, the efficient frontier is a collection of portfolios, each one optimal for a given
amount of risk.
The Sharpe-ratio measures the amount of return above the risk-free rate a portfolio provides compared to
the risk it carries. (31) Sharpe ratio on portfolio i ri r f Vi Where ri is the return on portfolio i, rf is the risk free rate and i is the standard deviation on portfolio i's
return. Thus, the Sharpe-ratio measures the risk premium on the portfolio per unit of risk. Download free ebooks at bookboon.com
37 Corporate Finance Risk, return and opportunity cost of capital In a well-functioning capital market investors can borrow and lend at th...
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- Spring '12