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According to the modern portfolio theory, the composition of the optimal risky portfolio (the point of tangency between CAL & efficient frontier) is the same
According to the modern portfolio theory, the composition of the optimal risky portfolio (the point of tangency between CAL & efficient frontier) is the same for all investors. How do individual investors vary their investment decision according to their risk tolerance? What should an investor who desires to earn a higher return than the return offered by the optimal risky portfolio do? Expected return (%) 12 11: 1 10- 6 8945 4 3 2 0 Er=7.16% CALO 10 Stocks Optimal risky portfolio, O MIN (minimum-variance portfolio) Bonds % = 10.15% 15 20 Standard deviation (%) 25 30 35 FIGURE 6.6 The optimal capital allocation line with bonds, stocks, and T-bills
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