How do you determine the equation of an efficient frontier? This question relates to BUS4028F 2017 Tutorial 2 question 12 i

Login

+1 vote

BUS4028F tutorial 2 2017 _SV_.pdf (0,2 MB)

How do you determine the equation of an efficient frontier? This question relates to BUS4028F 2017 Tutorial 2 question 12 i

+1 vote

Best answer

The efficient frontier is a relationship between \(E_P\) (expected portfolio return) and \(\sigma_P\) (portfolio standard deviation).

Suppose we invest a proportion \(\alpha\) in asset A. Then we can write down:

$$E_P = 0.05(1 + \alpha) \qquad ; \qquad \sigma_P^2 = 0.04 \alpha^2.$$

We can use these two equations to write \(E_P\) in terms of \(\sigma_P\):

$$E_P = 0.05 + 0.25 \sigma_P.$$

- All categories
- BUS 1003H - Introduction to Financial Risk (41)
- BUS 2016H - Financial Mathematics (47)
- BUS 3018F - Models (69)
- BUS 3024S - Contingencies (48)
- BUS 4028F - Financial Economics (20)
- BUS 4027W - Actuarial Risk Management (25)
- BUS 4029H - Research Project (5)
- Mphil (1)
- Calculus and Pure Mathematics (3)
- Statistics (16)

...