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In: Accounting

Show that any portfolio on the Capital Market Line (CML) with a positive weight in the...

Show that any portfolio on the Capital Market Line (CML) with a positive weight in the market portfolio is perfectly correlated with the market portfolio. Interpret this result.

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Expert Solution

Answer:

First we see that on a capital market line, any point speaks to the portfolio comprising of some weight of the market portfolio and a portion of the risk free asset.

Thus, assume

  • w = weight of the market portfolio ,
  • 1-w = weight of the risk free asset .

Along these lines, the return of this portfolio will be given as:

Return = w x Market Portfolio Return + (1-w) x sans risk Return.

Likewise, when we see the risk related with this portfolio, it would be given as = w x Risk of Market Portfolio. (as danger of risk free resource/asset is zero).

Consequently, we see that the return is a direct mix of the market portfolio return and the risk free return. In this way, there must be an immediate connection between's the portfolio return and the market portfolio return in light of the fact that the risk free return doesn't change.

Along these lines, this implies in the event that we are contributing on the capital market line our return would be associated with the market return.

ekkarill92 answered 2 years ago
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