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IV. Calculating the Efficient Frontier

IV. Calculating the Efficient Frontier. Calculating the Efficient Frontier Short sales are allowed, riskless lending and borrowing is allowed Short sales are allowed , no riskless borrowing and lending Short sales disallowed, riskless lending and borrowing allowed

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IV. Calculating the Efficient Frontier

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  1. IV. Calculating the Efficient Frontier

  2. Calculating the Efficient Frontier • Short sales are allowed, riskless lending and borrowing is allowed • Short sales are allowed , no riskless borrowing and lending • Short sales disallowed, riskless lending and borrowing allowed • Short sales disallowed , no riskless lending and borrowing • Special Cases • Riskless borrowing and lending at different rate • Lintner short sales – a more realistic case

  3. If short sales are allowed: • Portfolios of efficient portfolios are efficient • The entire efficient frontier is a portfolio of any • two portfolios on the efficient frontier • Each security has zero weight in at most 1 • efficient portfolio

  4. FORECAST OF FUTURE CAPITAL MARKET BEHAVIOR FORCAST OF SECURITY TYPES AND OR INDIVIDUAL SECURITIES USUALLY EMPLOY AS A BASIS ONE OF THE FOLLOWING FORECASTS: 1. INFLATION 2. TREASURY BILLS 3. TREASURY BONDS

  5. INFLATION 33.3% DIFFERENTIAL FOR BILLS .5% BILL RATE 3.8% DIFFERENTIAL FOR CORPS. 4.8% CORPORATE RATE 8.6% DIFFERENTIAL FOR STOCKS 5.1% STOCK RATE 13.7% DIFFERENTIAL FOR SMALL STOCKS 9.1% SMALL STOCK RATE 22.8%

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