Hi everyone,
I understand that in equilibrium portfolios plot on the SML but only those with perfect correlation (ρ=1) with the market, will plot also on the CML. All portfolios with ρ<1 will plot on the SML (in equilibrium) but below CML. Please confirm me if I’m right. I take advantage and ask you some doubts I have since level 1 and didn’t find the answer, yet. When constructing EF, we plot the universe of portfolios where x-axis represents standard deviation of returns and y-axis E(Rp). EF tells us that if we wanna achieve higher E®, we have to be willing to bear greater risk (σ). The risk return trade-off is obvious. Nevertheless, financial theory also tells us that only systematic risk is rewarded. σ contains both, systematic and unsystematic risk. Question is, do portfolios on the EF only bear systematic risk? If not, why should I expect higher reward for bearing greater unsystematic risk? Thank you very much in advance.