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Efficient Portfolios MGT 4850 Spring 2008 University of Lethbridge.

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1 Efficient Portfolios MGT 4850 Spring 2008 University of Lethbridge

2 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

3 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

4 Efficient frontier (2 portfolios)

5 Creating the frontier

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