or equivalently, the lowest risk for a given expected return is called an efficient portfolio (3) The line representing all efficient portfolio is called the efficient frontier (4) Markowitz efficient market frontier is not efficient once a risk-free asset is available at which to lend or borrow Efficient frontier of a 2 asset portfolio Efficient set for many securities: Given the opportunity set, we can identify the minimum variance portfolio. The section of the opportunity set above the minimum variance portfolio is the efficient frontier. Capital market line (CML) - also known as the new efficient frontier: If there is riskless borrowing and lending then we draw the steepest line from the risk-free rate tangent to the efficient frontier. Investors are able to allocate their money across the risk-free asset and the market portfolio with optimal result. Both CML and SML contain only efficient portfolios. The market portfolio: (1) The market portfolio is the portfolio at the tangent line of the risk free asset with the efficient frontier of all risky assets available. (2) All risky assets are included in this portfolio in proportion to their market value (3) Because it contains all the risky assets, it is a completely diversified portfolio, which means that all the unsystematic risk is diversified away (4) The market portfolio has a beta of 1 Efficient set for many securities with a risk free asset Risk lovers will pick a higher point on the CML (green x) Risk adverse people will pick a lower point on the CML (yellow x)
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