Question

The optimal risky portfolio can be identified by finding _____________.

Answer 1

Answer:

The optimal risky portfolio can be identified by finding the tangency point of the capital market line and the efficient frontier

Explanation:

Given the best risky portfolio and risk-free assets, we can construct the capital allocation line, which basically gives us the risk and return trade-offs that we can attain.

The slope of this capital allocation line gives us the excess reward per unit of risk provided by the risky portfolio. We obtain the solution to this problem by maximizing utility subject to the risk and return combinations that we can achieve, which essentially boil down to finding the tangency point, the highest indifference curve, and the capital allocation line.