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σM RISK AND PORTFOLIO MANAGEMENT WITH ECONOMETRICS, VER. 10/23/2012. © P. KOLM. 26 ⎡μ −r
f
μp = rf + σp ⎢⎢ M
⎢⎣ σM ⎤
⎥
⎥
⎥⎦ • The bracketed term in the equation for the CML is often referred to as the market price of risk RISK AND PORTFOLIO MANAGEMENT WITH ECONOMETRICS, VER. 10/23/2012. © P. KOLM. 27 Summary of discussion:
• An investor will select a portfolio on the CML that represents a combination of borrowing or lending at the riskfree rate and the market portfolio
o This is called portfolio separation or the two fund theorem
• Portfolios to the left of the market portfolio represent combinations of risky assets and the riskfree asset
• Portfolios to the right of the market portfolio include purchases of risky assets made with funds borrowed at the riskfree rate. Such a portfolio is
called a leveraged portfolio because it involves the use of borrowed funds
• Economic meaning of this risk premium: The numerator of the bracketed expression is the expected return from investing in the market beyond the
riskfree r...
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This document was uploaded on 02/17/2014 for the course COURANT G63.2751.0 at NYU.
 Fall '14

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