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The Capital Market Line CML CAPM. ReturnReturn Risk Drawing the Capital Market Line Step 1. Plot each portfolio onto the Risk/Return Chart Rp.

Published byErnesto Wrye Modified over 9 years ago

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Presentation on theme: "The Capital Market Line CML CAPM. ReturnReturn Risk Drawing the Capital Market Line Step 1. Plot each portfolio onto the Risk/Return Chart Rp."— Presentation transcript:

1 The Capital Market Line CML CAPM

2 ReturnReturn Risk Drawing the Capital Market Line Step 1. Plot each portfolio onto the Risk/Return Chart Rp

3 ReturnReturn Risk Drawing the Capital Market Line Step 2. Freehand draw the efficiency frontier by joining the outermost points to form a smooth curve Rp

4 PortfolioReturnPortfolioReturn Risk Drawing the Capital Market Line Step 3. Plot the risk free interest rate And then draw the capital market line from the risk free point at a tangent (just nicking) to the efficiency frontier CML Rp

5 Portfolio ReturnPortfolio Return Risk BINGO ITS DONE! CML Efficiency Frontier Efficient Portfolios Optimal Portfolio All portfolios below efficiency frontier are inefficient portfolios Rp Super-efficient portfolio

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