# Efficient Frontier

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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 vote
answered Jun 27 by (1,230 points)
selected Sep 14

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