Based on equation (3) we can now estimate the capital market line expected return for the degree of risk of the iwi's portfolio, [[sigma].
Consistent with intuition, when the proportion of wealth held in fisheries assets declines so does the capital market line expected return, as the portfolio becomes less risky.
b) By the way, Lemma 1 brings about the familiar equation of the Capital Market Line
(CML), albeit we derive the outcome not resorting to CML's assumptions.
To finish labeling the Portfolio worksheet select cell A134 and enter Sum of Weights; A135, enter Portfolio Variance; A136, enter Portfolio Standard Deviation; A137, enter Portfolio Return; and A138, enter Capital Market Line.
To find the best capital market line we will have solver maximize the trade-off between risk and return.
For if the straight line AA' were to go through point D, for example, the point of intersection with the capital market line
Either way, their resulting portfolios will not be invested in the same proportions as the market portfolio and thus will lie below the capital market line
in Figure 1.
The investor chooses a level of risk which depends directly on the slope of the capital market line
and inversely with the risk aversion parameter, h.
This implies that the solution of the optimization problem (59) can be found on the capital market line