Mean-Variance Optimization

Since the cml represents the return offered to

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Unformatted text preview: − rf 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 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 risk-free r...
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This document was uploaded on 02/17/2014 for the course COURANT G63.2751.0 at NYU.

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