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Efficient Frontier

+1 vote
asked Jun 21 in BUS 4028F - Financial Economics by anonymous
edited Jun 22
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 Answer

+1 vote
answered Jun 27 by Feroz (1,230 points)
selected Sep 14 by Richard van Gysen
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 \(\sigma_P\):

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