Investor’s Optimal Portfolio

  • [d] Risk aversion and its implications for an investor’s portfolio
  • [e] Select an optimal portfolio based on investor’s utility and the capital allocation line.
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Terms covered: Indifference curve, Efficient frontier, Capital Allocation Line

CAL Construction & Sharpe Ratio

Capital Allocation Line (CAL) Explorer

Drag the blue dot (Risky Portfolio P) along the Efficient Frontier (gray curve). Observe how the Capital Allocation Line (purple) and the Sharpe Ratio change. Try to find the portfolio that gives the highest Sharpe Ratio!

Selected Risky Portfolio (P): Risk = %, Return = %

Sharpe Ratio for current CAL: