1 IV. Calculating the Efficient Frontier

2 Calculating the Efficient Frontier 1)Short sales are allowed, riskless lending and borrowing is allowed 2)Short sales are allowed, no riskless borrowing and lending 3)Short sales disallowed, riskless lending and borrowing allowed 4)Short sales disallowed, no riskless lending and borrowing Special Cases Riskless borrowing and lending at different rate Lintner short sales – a more realistic case

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11 If short sales are allowed: Portfolios of efficient portfolios are efficient The entire efficient frontier is a portfolio of any two portfolios on the efficient frontier Each security has zero weight in at most 1 efficient portfolio

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22 FORECAST OF FUTURE CAPITAL MARKET BEHAVIOR FORCAST OF SECURITY TYPES AND OR INDIVIDUAL SECURITIES USUALLY EMPLOY AS A BASIS ONE OF THE FOLLOWING FORECASTS: 1. INFLATION 2. TREASURY BILLS 3. TREASURY BONDS

23 INFLATION 33.3% DIFFERENTIAL FOR BILLS.5% BILL RATE 3.8% DIFFERENTIAL FOR CORPS. 4.8% CORPORATE RATE 8.6% DIFFERENTIAL FOR STOCKS5.1% STOCK RATE 13.7% DIFFERENTIAL FOR SMALL STOCKS9.1% SMALL STOCK RATE 22.8%

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