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Plot the efficient frontier

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Reference no: EM133077568

In the modern theory of investment, the investor may use the efficient frontier how to optimize their optimal portfolio. The Capital Allocation Line (CAL) is a line created on a graph of all possible combination between risk-free rate asset and risky assets. The efficient frontier to show the best possible return and the risk that can are attainable. Assume the risk-free rate is 3%. Azlan is a risk-averse investor and he attracted to the modern theory and he try to apply with the real practice.

Use the following data to answer the questions:

Portfolio

Return (rp)

Risk (σp)

A

B

C

D

E

F

G

IC1

IC2

IC3

 

20%

14

18

11

14

4

10

22

23

18

14%

9

9

4

5

8

10

4

8

18

Required:

  1. Plot the efficient frontier from the above data in the table on the graph paper. Analyse your findings from the graph.
  2. Plot the indifference curves (IC1, IC2 and IC3) from the risk-free point and the data as in the table above. Analyse your IC1, IC2 and IC3 to formulate the best optimal portfolio.
  3. By using the Capital Market Line (CML), explain to Azlan how it can benefit him and may attract him to invest in the capital market. Support with the CML on the same graph paper.

Reference no: EM133077568

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