Is it that CAL always tangent with effient frontier? or sometimes it runs through effient frontier? so confused.
Please add some comments.
As I recall, it works like this. The expected return is simply the weighted avg return between two assets. The efficiant frontier is made up of a number of portfolios along the frontier but only one dominates all others. So when you add the the risk free asset to some portfolio on the effcient frontier you will get a line. That line will be tangent to the frontier ONLY for the dominant portfolio…otherwise I think it will run through the frontier. The point is, that you would not choose to do this since it does not produce the lowest mean varriance/return
It will be tangetial to to the fficient frontier. Don’t think it will ever cut across if you think of the efficient frontier curve as a hyperbola or a C shaped curve.
a good explanation in this previous thread - http://www.analystforum.com/forums/cfa-forums/cfa-level-i-forum/91264989
So are you saying that the CAL has to involve the most efficiant portfolio on the frontier? What if you choose a portfilo that is less efficiant and mix it with the risk free asset. Wouldn’t the line then run through the frontier? I am not saying anyone would do this but I am just saying its possible right or does that change the meaning of the CAL?
If you choose a portfolio that is less efficient it is going to lie below the efficient frontier. The efficient frontier only consists of efficient portfolios.
If you mix your tangent (optimal) portfolio with the risk free assets, you will lie on the CAL in between the point of tangency and the y intercept.
There are many CAL but only one CML. CML lies tangent on the efficient frontier.
I cannot post long messages longer than one line!