Doubts relating to Portfolio Management

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Joined: Sun Nov 02, 2014 12:26 pm

Doubts relating to Portfolio Management

Postby r.kumar30189 » Sun Nov 02, 2014 12:28 pm

I had little difficulty understanding the following.Can somebody please explain.

1.Efficient Frontier
2.Capital Allocation Line
3.Security Market Line

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Doubts relating to Portfolio Management

Postby edupristine » Mon Nov 03, 2014 10:52 am

Efficient Frontier

A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a given level of expected return.
Portfolios that lie below the efficient frontier are sub-optimal, because they do not provide enough return for the level of risk.
Portfolios that cluster to the right of the efficient frontier are also sub-optimal, because they have a higher level of risk for the defined rate of return.

Capital allocation line (CAL)

It is a graph created by investors to measure the risk of risky and risk-free assets. The graph displays the return to be made by taking on a certain level of risk.
Expected return on a portfolio P = Risk Free Rate + Standard Dev of Portfolio (Exp return on Portfolio – Risk free rate)/ Std Dev of Portfolio

Security Market Line

A line that graphs the systematic or market risk (Beta) versus return of the whole market at a certain time. This is also known as characteristic line.

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