COMM 308 Chapter Notes - Chapter 9: Capital Asset Pricing Model, Efficient Frontier, Modern Portfolio Theory
7 Nov 2016
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The efficient frontier with risk-free borrowing and lending. Portfolios of risky securities that lie along efficient frontier (above mvp) are efficient and dominate all other possible portfolios of risky securities. For given level of risk, as defined by sd of their return, these portfolios offer highest er. Risk-averse person needs risk premium - expected payoff that induces risk-averse person to enter into risk situation to be induced to enter into risky situation. Higher risk premiums indicate greater risk aversion. Insurance premium - payment to get out of a risky situation. Conclusion that investors will only choose portfolios on efficient frontier above mvp. Know more risk-adverse than b because line going through a is steeper than line through b. Slope of line is height, which is er on portfolio, divided by length, which is. Since line through a steeper, individual who invests in a requires higher expected rate of return per unit of risk (more risk averse)
