The Modern Portfolio Theory (MPT) suggests that, without the ability to invest in a risk-free asset, a rational investor
Posted: Sat Nov 27, 2021 5:15 pm
The Modern Portfolio Theory (MPT) suggests that, without the
ability to invest in a risk-free asset, a rational investor will
select a portfolio (of only risky assets) on the efficient frontier
(may or may not be the Market portfolio M) that best suits their
investment needs. However, when the investor can invest in a
risk-free asset, he/she can now select a portfolio that consists of
the Market portfolio M (a specific portfolio that also lies on the
efficient frontier) and the risk-free asset. If the investor is
presented with both portfolios, explain which portfolio should this
investor choose? Feel free to use graph to support you answer.
ability to invest in a risk-free asset, a rational investor will
select a portfolio (of only risky assets) on the efficient frontier
(may or may not be the Market portfolio M) that best suits their
investment needs. However, when the investor can invest in a
risk-free asset, he/she can now select a portfolio that consists of
the Market portfolio M (a specific portfolio that also lies on the
efficient frontier) and the risk-free asset. If the investor is
presented with both portfolios, explain which portfolio should this
investor choose? Feel free to use graph to support you answer.