Just had some questions regarding the efficient frontier and the CAL. As i understand it the point where the CAL is tangent to the efficient frontier is the optimal mix of risky assets. However I also noticed that on the same CAL there is a point where the indifference curve will be tangent to the CAL. What does this point represent?
closed as off-topic by Alex C, skoestlmeier, LocalVolatility, Lliane, Helin Feb 14 at 22:08
This question appears to be off-topic. The users who voted to close gave this specific reason:
- "Basic financial questions are off-topic as they are assumed to be common knowledge for those studying or working in the field of quantitative finance." – Alex C, skoestlmeier, LocalVolatility, Lliane, Helin
The tangent portfolio is the optimal portfolio of risk assets. So under the Modern portfolio theory world, all investors will buy and hold this portfolio if they want to make an investment in risky assets.
The point where indifference curve and the CAL meets tells how much of your wealth would be invested in (1) the risk-free asset and (2) the optimal portfolio (= tangent portfolio) of risk assets.
For example, if the indifference curve happens to meet the CAL, exactly where the tangent portfolio meets the CAL, then it means that the investor would invest 100% of her wealth in the optimal portfolio of risky assets and 0% in risk-free asset.