Modern Portfolio Theory, CT8 Apr 09 Q4

Discussion in 'CM2' started by Edward Smith, Apr 6, 2021.

  1. Edward Smith

    Edward Smith Active Member

    Part (iii), why are we differentiating and hence minimising the gradient with respect to Xa ? Is this the line that provides the highest expected return at lowest variance ?
     
  2. Steve Hales

    Steve Hales ActEd Tutor Staff Member

    Hi
    We're actually looking to maximise the gradient rather than minimise it. We need the straight line with maximal gradient which still coincides with the opportunity set of risky assets. This will provide the highest expected return for a given level of variance.
    Hope that helps.
     

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