In this case the investor can obtain an expected

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: e same rate. Consider an investor who borrows and invests fraction of the funds in a portfolio of stocks and the rest in short-term government bonds. In this case the investor can obtain an expected return from such an allocation along the line from the risk free rate rf through the tangent portfolio in Figure 5. As lending is the opposite of borrowing the line continues to the right of the tangent portfolio, where the investor is borrowing additional funds to invest in the tangent portfolio. This line is known as the capital allocation line and plots the expected return against risk (standard deviation). Figure 5: Portfolio theory Expected Return (%) Market portfolio Risk free rate Standard Deviation The tangent portfolio is called the market portfolio. The market portfolio is the portfolio on the efficient frontier with the highest Sharpe-ratio. Investors can therefore obtain the best possible risk return trade-off by holding a mixture of the market portfolio and borrowing or lending. Thus, by combining a ris...
View Full Document

This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.

Ask a homework question - tutors are online