Simple Construction of the Efficient Frontier

David Feldman, Haim Reisman

Research output: Contribution to journalArticlepeer-review

12 Scopus citations

Abstract

We provide simple methods of constructing known results. At the core of our methods is the identification of a simple concise basis that spans the Capital Market Line (CML). We show that a portfolio whose risky assets weights are the product of the inverse variance-covariance matrix of (nonredundant) security rates of return times the vector of the excess expected rates of return over the risk-free rate is a CML portfolio. This portfolio and the risk-free security span the CML. In addition, with this basis, there is immediate construction of the efficient frontier of risky assets (the ‘hyperbola’), ‘tangency’ portfolios, ‘reflection’ portfolios, and a CAPM relationship. Our method is quick and simple. It is easy to derive, teach, implement, interpret, and remember.

Original languageEnglish
Pages (from-to)251-259
Number of pages9
JournalEuropean Financial Management
Volume9
Issue number2
DOIs
StatePublished - 1 Jan 2003

Keywords

  • Asset pricing
  • Capital market line
  • Efficient frontier
  • G10
  • G11
  • G12
  • Portfolio frontier

ASJC Scopus subject areas

  • Accounting
  • Economics, Econometrics and Finance (all)

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