Efficient Portfolios MGT 4850 Spring 2008 University of Lethbridge
Capital Asset Pricing Model Assumptions Perfect Competition – Individual investors are price takers Single Investment Horizon Investments are limited to traded financial assets No taxes or transaction costs Investors are rational mean variance optimizers Homogeneous expectations
Capital Asset Pricing Model Equilibrium Conditions All investors will hold the same portfolio of risky assets – the market portfolio Market Portfolio contains all securities Risk premium on the market depends on the average risk aversion of all market participants Risk premium on an individual security is a function with its covariance with the market
Efficient frontier (2 portfolios)
Creating the frontier