This preview shows page 1. Sign up to view the full content.
Unformatted text preview: − rf
σM RISK AND PORTFOLIO MANAGEMENT WITH ECONOMETRICS, VER. 10/23/2012. © P. KOLM. 26 ⎡μ −r
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 risk-free 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 risk-free asset
• Portfolios to the right of the market portfolio include purchases of risky assets made with funds borrowed at the risk-free 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
View Full Document
This document was uploaded on 02/17/2014 for the course COURANT G63.2751.0 at NYU.
- Fall '14