CAPM

1
CAPM

• The Capital Market Line
• CML

2
Drawing the Capital Market Line
Step 1. Plot each portfolio onto the Risk/Return
Chart
Return
Rp
Risk
3
Drawing the Capital Market Line
Step 2. Freehand draw the efficiency frontier by
joining the outermost points to form a smooth
curve
Return
Rp
Risk
4
Drawing the Capital Market Line
Step 3. Plot the risk free interest rate
CML
Por t fol io Return
And then draw the capital market line from the
risk free point at a tangent (just nicking) to
the efficiency frontier
Rp
Risk
5
BINGO
ITS DONE!
Por t fol io Return
CML
Super-efficient portfolio
Efficient Portfolios
Optimal Portfolio
Efficiency Frontier
All portfolios below efficiency frontier are
inefficient portfolios
Rp
Risk