Page 22 - FINAL CFA SLIDES DECEMBER 2018 DAY 12
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Session Unit 12:
Figure 3: Determining the Optimal Risky
Portfolio & Optimal CAL Assuming 42. Portfolio Risk and Return: Part II
Homogeneous Expectations, p.151
Capital Market Line (CML) –expected
portfolio return, E(R ), is a linear function
P
of portfolio risk, σ :
P
CAL started from efficient frontier, the optimal CAL
hence must be tangential to efficient frontier and if
optimal CAL is CML, then CML most be tangential to
efficient frontier!
tanties
CAL is all combinations of portfolios with risk free and
risky assets assuming all investors are risk averse and
CML then assumes they have same estimates of risks,
returns and return-corrections -and hence face the same
market portfolio of assets!
Market risk premium!
E(Rp) = Rf + {E(Rm) – Rf} Óp y intercept = Rf and slope = {E(Rm) – Rf}
Óm Óm
Re-writing CML equation, we have: E(Rp) = Rf + {E(Rm) – Rf} Óp
Óm
