It is important to understand that a large number of straight lines can emerge from y-axis at Rf 5% , each having a

different slope; but all straight lines emerging from R f 5% pass through many inefficient portfolios except the one
shown above which is just touching the Markowitz efficient frontier and therefore passing through only one
portfolio, and that portfolio is efficient because it is located on north –westerly part of the feasible set of
portfolios. Let us call this tangency portfolio “P”. On the other hand a straight line emerging from Rf 5% at vertical
axis and having higher slope than straight line shown above passes beyond (left of) the feasible portfolios; there
are no portfolios in that area and therefore no X i, and condition that sum of Xi =1 won’t be fulfilled. The upward
sloping straight line shown in the graph touches only one efficient portfolio on the efficient set of Markowitz, and
this portfolio is located at the tangency point (touching point) of straight line with the Markowitz efficient frontier
curve. To find weights (X i) of stocks included in this Markowitz efficient portfolio “ P”, a mathematical
programming problem has to be solved as explained below.

Objective function = Maximize excess portfolio return per unit of total risk

i.e. Maximize= (Rp – Rf) / (VARp). (30 - 5) /10 = 25%/10 =2.5%/1 = 2.5%

Constraint : ∑Xi = 1 means the st line passes through only one portfolio

Please note actually the objective function is : Maximize slope of the straight line so that it still touches efficient set
at least at one portfolio and therefore the sum of Xi is one; and our task is to solve for the weights (X i) of stocks
included in such tangency portfolio which is identified in this case as portfolio ”P”. Since slope of this straight line
is rise / run , that is : (R p – Rf) /(VARp - VARRf). Therefore objective function should have be written as : Maximize
(Rp – Rf) /(VARp - VARRf), but since VAR Rf is zero by definition therefore it is not shown; and in most text books it
is written as: Maximize excess return per unit of risk, or as: Maximize: (R p – Rf) / VARp.

Any line with lesser slope would pass through many in-efficient portfolios and the weights won’t add up to one
because of it passing through multiple portfolios. By maximizing the slope of the straight line drawn in the graph
above so much that sum of Xi is one is in fact ensuring the line would pass through only one portfolio at the
North-Western outer edge of the feasible set and that would be an efficient portfolio. The solution of this
mathematical programming problem would be the weights ( X i) of the securities included in such an efficient
portfolio because all other data items for the objective function are available, that is, Ri, VARi, COV i,j. Note that
it is not a linear programming problem; because VAR p formula has in it some terms which are squared such as ∑
2
X i VAR i.
In financial markets, selling is the flipside of buying. You are in the market as investor as long as
you have bought some shares and have not sold them as yet. It is called having an open long
position in that security. And you would have this open long position until you sell those shares
though it may be after 10 years; so in that case you would have an open long position in that
share for 10 years. Once the shares you had bought earlier have been sold then you have “closed
your long position”, or simply you are out of the market; it is also called profit taking. Because
naturally you sell those shares if their price has increased and selling gives you profit. Usually on
a day when a lot of investors have closed their long position by selling the shares they had held,
the prices of shares and therefore share price index falls, and the media reports that due to
profit taking by the investors the index had fallen on that day.
On the other hand if you initiated your entry in the market by selling some shares first which you
did not have but you had borrowed those shares from a broker and then sold these in the hope
that in future the price would go down then you would buy these shares and returned to the
person from whom you had borrowed those, then it is called short selling , or simply you have
short position in the market. You have an open short position as long as you do not close your
short position by buying the same shares from the market and returning them to the broker.
Until you do that you are in the market, though it may be for a few months. It is necessary to
close your short position ultimately by buying the shares and returning the same to the broker
who had initially lent you these shares.