Figure 7.

6 The Opportunity Set of the

Debt and Equity Funds and Two
Feasible CALs

7-1
 Optimal Risky Portfolio
• The Expected return and standard deviation of
portfolio of two risky assets

7-2
 Optimal risky Portfolio
• Maximize the slope of the CAL for any possible
portfolio, p
• The objective function is the slope:

7-3
Optimal risky Portfolio

7-4
 Figure 7.7 The Opportunity Set of the
Debt and Equity Funds with the Optimal
CAL and the Optimal Risky Portfolio

7-5
Optimal Complete Portfolio

7-6
Figure 7.8 Determination of the Optimal
Overall Portfolio

7-7
Figure 7.9 The Proportions of the
Optimal Overall Portfolio

7-8
Assignment-2

7-9
 Markowitz Portfolio Selection Model

• Security Selection
– First step is to determine the risk-return
opportunities available
– All portfolios that lie on the minimum-
variance frontier from the global minimum-
variance portfolio and upward provide the
best risk-return combinations

7-10
 Markowitz Portfolio Selection Model
Continued
• Now the individual chooses the appropriate
mix between the optimal risky portfolio P and
T-bills as in Figure 7.8
• The expected return and variance of any
risky portfolio is:

7-11
Figure 7.10 The Minimum-Variance
Frontier of Risky Assets

7-12
Figure 7.12 The Efficient Portfolio Set

7-13
Figure 7.13 Capital Allocation Lines with
Various Portfolios from the Efficient Set

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Capital Allocation and the Separation
Property
• The separation property tells us that the
portfolio choice problem may be separated
into two independent tasks
– Determination of the optimal risky portfolio
is purely technical
– Allocation of the complete portfolio to T-
bills versus the risky portfolio depends on
personal preference

7-15