0
$\begingroup$

I know that the tangency point between the CAL line (drawn from risk-free asset's return) and the efficiency frontier is the optimal risky portfolio. But what if there is no risk free asset? Can I draw CAL line without risk free asset? How do I find the optimal risky portfolio on the efficient frontier?

Improve this question
$\endgroup$
1
  • 1
    $\begingroup$ I thought the original approach was to build your indifference curves and select the portfolio that lies on the intercept the most upper-left curve and the efficient frontier. $\endgroup$
    – ruslaniv
    Jun 2 '20 at 7:32
2
$\begingroup$

"Fischer Black (1972) developed another version of CAPM, called Black CAPM or zero-beta CAPM, that does not assume the existence of a riskless asset" Source : Wikipedia

In this model there is no straight line CAL, but investors can choose a point on the (curved) efficient frontier that provides a suitable risk/return combination, by holding a mix of the Market Portfolio and the Zero Beta Portfolio, a portfolio orthogonal to the Market Portfolio. The chosen point is where the investor's iso-utility curve is tangent to the efficient frontier.

Look up Black CAPM or Zero Beta CAPM for more details.

Improve this answer
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.