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

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Presentation transcript:

The Capital Market Line CML CAPM

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

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

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

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