George Philip
Active Member
I was going through the consequence of the additional assumption for CAPM in Chapter 8 pg 5 and I was hoping someone could explain the second consequence namely:
2. If in addition they are all subject to the same risk-free rate of interest, the efficient frontier collapses to the straight line in E -sigma space which passes through the risk-free rate of return on the E-axis and is tangential to the efficient frontier for risky securities.
I understand as to why the risk-free rate of interest is a straight line in the E-sigma space as proved in Chapter 6 but could someone explain as to why this straight line will always be tangential to the Efficient frontier?
There is a similar question in pg 6 answering this and I understood why the risk-free straight line can't pass below but I was not able to understand why it can't pass above the efficient frontier
2. If in addition they are all subject to the same risk-free rate of interest, the efficient frontier collapses to the straight line in E -sigma space which passes through the risk-free rate of return on the E-axis and is tangential to the efficient frontier for risky securities.
I understand as to why the risk-free rate of interest is a straight line in the E-sigma space as proved in Chapter 6 but could someone explain as to why this straight line will always be tangential to the Efficient frontier?
There is a similar question in pg 6 answering this and I understood why the risk-free straight line can't pass below but I was not able to understand why it can't pass above the efficient frontier