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 language | English |
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Pages (from-to) | 251-259 |
Number of pages | 9 |
Journal | European Financial Management |
Volume | 9 |
Issue number | 2 |
DOIs | |
State | Published - 1 Jan 2003 |
Keywords
- Asset pricing
- Capital market line
- Efficient frontier
- G10
- G11
- G12
- Portfolio frontier
ASJC Scopus subject areas
- Accounting
- General Economics, Econometrics and Finance