March 2010
Intermediate to advanced
238 pages
5h 59m
English
Content preview from Portfolio Optimization
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Sec. 3.2 The Security Market Line 51
We next calculate the equation of the CML using (3.21) as follows.
Using x
m
above, we calculate
µ
m
= µ
′
x
m
= 1.1744, σ
2
m
= x
′
m
Σx
m
= 0.0099,
and
σ
m
= 0.0995,
µ
m
− r
σ
m
=
1.1744 −1.02
0.0995
= 1.5518.
From (3.21), the equation of the CML is
µ
p
= 1.02 + 1.5518 σ
p
,
in agreement with (3.27). ♦
3.2 The Security Market Line
In this section we continue using the model problem Section 3.1 and
repeat that model problem here for convenience:
minimize : −t(µ
′
, r)
x
x
n+1
+
1
2
x
x
n+1
′
Σ 0
0
′
0
x
x
n+1
subj ect to : l
′
x + x
n+1
= 1
.
(3.28)
The optimality conditions for (3.28) were formulated in Section 3.1 as
(3.4) and (3.3). We repeat these here.
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