A fellow AFer asked me to post the following questions for the views/comments of the community. I believe that he is unable to log in to his account. Any responses will be highly appreciated. 1)What are the assumptions sufficient to guarantee that the market portfolio is an efficient portfolio? 2) Can anyone please explain if in the CAPM there is any way to identify the investors who are more risk averse?. would the answer change if there is no risk free asset? 3) If we are given the risk free borrowing and the lending rate,is it then true or false that efficient portfolios have no unsystematic risk.? can anyone please explain how? Many thanks folks.
Homework questions? Oh well, here’s a shot: 1) If their is a rf asset, the market portfolio needs to fall on the tangent that the SML makes on the efficient frontier. If there is no rf asset, it just needs to be on the efficient frontier. I don’t know if you want to state further assumptions to establish either of these scenarios… 2) If their is a rf asset, the more risk averse you are, the more the tangent that your utility curve makes with the SML will be to the left. If their is no rf asset, the more risk averse you are, the more the tangent that your utility curve makes with the efficient frontier will be to the left. 3) What does “efficient portfolio” mean here? Portfolios on the efficient frontier or the market portfolio? Only the market portfolio (the tangential SML portfolio) will have no unsystematic risk if there is a rf asset. All portfolios have systematic risk. Any portfolio with more risk/return that is possible in any scenario must have unsystematic risk. There you go. I hope your friend gets at least partial credit…
ohai Wrote: ------------------------------------------------------- > Homework questions? Oh well, here’s a shot: > > > There you go. I hope “YOU” get at least > partial credit… I edited your post.
Haha thanks ohai. dhyun3 - I am unfortunately working full time. University days used to be fun! Thanks in advance to all those who chose to respond.