IDEAS home Printed from https://ideas.repec.org/p/col/000463/003304.html
   My bibliography  Save this paper

Optimal Portfolio Selection: A Note

Author

Listed:
  • Ignacio Velez-Pareja

Abstract

Usually in financial textbooks and courses the theory of portfolio selection is taught in a strictly theoretical way. There is a model (Markowitz) that stipulates that an investor has preferences and that she will choose the best portfolio, given her preference curves and an efficient frontier. On the other hand, the Capital Asset Pricing Model (CAPM) is presented as it is: a genial idea that served to simplify and to make operative the Markowitz setup. Most students and practitioners conclude that those models are just inapplicable theory. This is the most rational behavior one can expect. What can an investor do with the textbook recipes to configure an optimal portfolio? Very little. My purpose with this note is to rescue a simple procedure presented by Black (1972), Merton (1973) and later by Levy and Sarnat (1982), Elton and Gruber (1995) and Benninga (1997). They just propose that the optimal portfolio can be found maximizing the slope of the line that joins the point of risk-free return and the efficient frontier. When this maximum tangent is reached, that line is the capital market line (CML) (it is tangent to the efficient frontier). This is a simple procedure that does not require one to calculate the efficient frontier and is an easy task with Excel Solver. It is just one point of the efficient frontier. An example is presented.

Suggested Citation

  • Ignacio Velez-Pareja, 2000. "Optimal Portfolio Selection: A Note," Proyecciones Financieras y Valoración 3304, Master Consultores.
  • Handle: RePEc:col:000463:003304
    as

    Download full text from publisher

    File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=234883
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    CAPM;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:col:000463:003304. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ignacio Velez (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.