The efficient set Theorem E(P)Efficient frontier H Feasible E se G
E(rP ) s H Feasible E set G The Efficient Set Theorem Efficient frontier
The efficient set Theorem The efficient frontier The efficient frontier or efficient set is a set of portfolio which meets both conditions of the efficient set theorem It is from this set of efficient portfolios that the investor will find his or her optimal one All the other feasible portfolios are inefficient portfolio and can be ignored
The Efficient Set Theorem • The efficient frontier – The efficient frontier or efficient set is a set of portfolio which meets both conditions of the efficient set theorem. – It is from this set of efficient portfolios that the investor will find his or her optimal one. – All the other feasible portfolios are inefficient portfolio and can be ignored
The efficient set Theorem The optimal portfolio The optimal portfolio correspond to the point where an indifference curve is just tangent to the efficient set (WHY?) There will be only one tangency point between the investors indifference curves and the eficient set (WHy?)
The Efficient Set Theorem • The optimal portfolio – The optimal portfolio correspond to the point where an indifference curve is just tangent to the efficient set. (WHY?) – There will be only one tangency point between the investor’s indifference curves and the efficient set. (WHY?)
The efficient set Theorem E(P) H Feasible set
The Efficient Set Theorem I3 I2 E(rP ) I1 S H O* Feasible E set G