If this assumption is relaxed, why are there a band of CMLs? Doesn’t that assume each investor has the same Return/Risk expectations, with the only thing different being the rf? I would’ve expected that they should all intersect the Y axis at rf, but have different slopes. Thanks guys.
if we relax that assumption my view of the risk free rate still might be different that yours. You might think the US government rate is risk free, but I might think that the US government is not stable due to the way the dollar is depreciating. Or my risk free rate is borrowing from my Rich father for 1% a year. anyhow, you get the point.
is the homogenous expectations assumption strictly to do with the risk-free rate? if it is, then i see what yickwong in saying… if the risk-free changes but the EF stays the same, then the only thing that changes is the SLOPE of the CML… however, i guess you could still call this a sort of “band”
no, homogenous expectations apply to all stocks and portfolios…it just simply says that for every stock/portfolio, we all see the exact same risk/return. If we relax it, everybody sees everything just a tiny bit different, it will create a band
What i’m visualising of this ‘band’ is different rf’s but the same slope (sharpe ratios). Is it because these risk/return ratios are fact, so the slope cannot change? I get your point of the rf asset being different LongOnCFA.
hmmm yeh i’ll go with longoncfa… so, if we relax the homogenity(?), everyone sees EVERYTHING a little differently (not just the risk-free)… so, just imagine looking at the graph of the CML… now, imagine everything (the CML, risk-free, efficient frontier, everything) goes a bit blurry… presto, theres your “band”
i dunno what exactly you are talking about yick, i think you are thinking way too much into this, just read blueys post. That summarizes it very well… the whole point is risk/return is not a FACT (under relaxed assumption)…everyone might calculate it a bit differently under heterogenous expectations.