Simple Construction of the Efficient Frontier

9 Pages Posted: 24 Nov 2001

See all articles by David Feldman

David Feldman

Banking and Finance, UNSW Business School, UNSW Sydney; Financial Research Network (FIRN)

Haim Reisman

Technion-Israel Institute of Technology - William Davidson Faculty of Industrial Engineering & Management

Multiple version iconThere are 2 versions of this paper

Date Written: November 11, 2002

Abstract

We provide simple methods of constructing known results. At the core of our methods is the identification of a simple concise basis that spans the Capital Market Line (CML). We show that a portfolio whose risky assets weights are the product of the inverse variance-covariance matrix of (nonredundant) security rates of return times the vector of the excess expected rates of return over the risk-free rate is a CML portfolio. This portfolio and the risk-free security span the CML. In addition, with this basis, there is immediate construction of the efficient frontier of risky assets (the "hyperbola"), "tangency" portfolios, "reflection" portfolios, and a CAPM relationship. Our method is quick and simple. It is easy to derive, teach, implement, interpret, and remember.

Keywords: portfolio frontier, efficient frontier, capital market line, asset pricing

JEL Classification: G10, G11, G12

Suggested Citation

Feldman, David and Reisman, Haim, Simple Construction of the Efficient Frontier (November 11, 2002). EFMA 2002 London Meetings. Available at SSRN: https://ssrn.com/abstract=291654 or http://dx.doi.org/10.2139/ssrn.291654

David Feldman (Contact Author)

Banking and Finance, UNSW Business School, UNSW Sydney ( email )

UNSW Sydney, NSW 2052
Australia
+61 2 9385 5748 (Phone)
+61 2 9385 6347 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Haim Reisman

Technion-Israel Institute of Technology - William Davidson Faculty of Industrial Engineering & Management ( email )

Haifa 32000
Israel
+972-4-829-4442 (Phone)
+972-4-823-5194 (Fax)

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