example, in the one risky and one riskless asset portfolio model with unit initial wealth,
and where ρ is the riskless return and σ
r
and μ
r
are the risk and expected return for the
risky asset, the opportunity set in (σ, μ) space is a straight line with vertical intercept
(0, ρ) and slope equal to
µ
r
−ρ
σ
r
. This is also illustrated in Figure 3.1. The value of this slope
is referred to as the price of risk in the M-V decision model. This price of risk represents
the extra expected return over the risk-free return that is earned by assuming an addi-
tional unit of risk as measured by the standard deviation of return. The opportunity ...
Become an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month, and much more.