April 2012 Question 2

[Alfie]

Hi, Im not sure if i am missing something, but how do the solutions so easily deduce that P doesnt lie on the capital market line? Im unsure how we can tell from the information we have that the risky part doesn't comprise risky assets in the same proportions as the market portfolio?

Any help is much appreciated,
Thanks

 

[John Potter]

The question says that the portfolio "is equally weighted in the five assets and the risk-free asset." The market capitalisations are not

John

 

[Alfie]

The question says that the portfolio "is equally weighted in the five assets and the risk-free asset." The market capitalisations are not

John

Hi John - I see, thank you for your help on this. So i assume then that it is a requirement for the proportions of the market portfolio to match those in overall portfolio in order to lie on the capital market line? Thank you

 

[John Potter]

Yes. This is one of the results of the CAPM. I would phrase it more the other way round...

For a portfolio to lie on the CML, its composition of risky assets must be equal in proportion to that of the market portfolio.

 

[Alfie]

Yes. This is one of the results of the CAPM. I would phrase it more the other way round...

For a portfolio to lie on the CML, its composition of risky assets must be equal in proportion to that of the market portfolio.

Thanks alot!! Makes a lot of sense now