Question: Optimal Portfolios (You may want to draw a graph for this example, be sure to clearly label the axis and curves)
Discuss the shape of the Investment Opportunity Set of two risky assets with a correlation of .4. What does this curve represent?
How is the optimal Capital Allocation Line determined? What does this line represent?
Suppose one investor has a preference to hold 50% risk free and in the 50% risky assets. Is this attainable? Describe where the investor's optimal portfolio will fall in relation to the Investment Opportunity Set and CAL.
What if we had the opposite investor, one that is risk loving? Discuss where on your graph this individual portfolio may fall.