For a given level of the expected return we evaluate the proportion of the investors wealth to invest in the Market Portfolio (as constructed in MarketPortfolio) such that we have the Capital Market Line (CML) portfolio which offers to lowest risk for the given level of the expected return.
The weighting of the Market Portfolio within a portfolio on the CML with a given expected return. The weighting of the Market Portfolio is the factor of the base capital which is invested within the Market Portfolio within the portfolio selected from the CML. Note that since the portfolio can borrow money from the market this weighting can be greater than 1
.
Further Explanation
In order to evaluate the weighting of the Market Portfolio we are required to provide the expected return of the desired portfolio on the CML, the expected return of the Market Portfolio and the prevailing market rate at which cash can be borrowed or lent to the market. The market rate at which cash can by borrow or lend should be known but the expected return of the Market Portfolio should be evaluated using MarketPortfolioExpectedReturn. Which in turn requires that the Market Portfolio in known, which can be constructed using MarketPortfolio, which depends firstly the asset weights constraints (if applicable) being set using SetConstraints before the Efficient Frontier is constructed using CalculateEfficientFrontier.
Remark:
Completeness of the Methods: WeightCML, ReturnCML, RiskCML, Weight2Risk
The portfolio on the CML can be selected from knowledge of its total risk, expected return or weight of the Market Portfolio. Then using the above mentioned methods we are able to evaluate the other quantities which are not given. For example, if the expected return of the portfolio is known then the weight of the market portfolio can be evaluated using WeightCML and the risk can be evaluated using RiskCML. If on the other hand the total risk of the portfolio is known then the corresponding expected return of the portfolio can be evaluated by ReturnCML, and then using this deduced value we are able to evaluated the weight of the Market Portfolio using WeightCML. For completeness we include the method Weight2Risk which evaluates the risk of a portfolio on the CML when the weight of the Market Portfolio within the CML portfolio is known. From knowledge of the risk of the CML portfolio we able to evaluate the corresponding value of the expected return using the method ReturnCML.
Therefore, using the three `...CML' methods along with `weight2Risk', which one of: total risk, expected return or weight of Market Portfolio, is used in order to selected the portfolio from the CML we are able to deduce the other two quantitative properties.
Remarks on time units and the percentage convention used
Within the application of this method you are required to provide a number of of parameters which are quoted within respect to a given period of time, such as `per year', `per month' and so on. Within the application of this method it is important to point out that the time unit used for each of these parameters should correspond. For instance the expected return of the desired portfolio, expected return of the Market Portfolio and the market rate at which money can be lent or borrowed which are each given in decimal format (i.e. 1 percent = 0.01) should be given with respect to the same unit of time. Moreover, the returned value of the expected return of the portfolio on the CML will also be expressed with respect to the same unit of time and in decimal format (i.e. 1 percent = 0.01).
CapitalMarket Class | WebCab.COM.Finance.Portfolio Namespace | RiskCML - allow the risk of a portfolio on the CML to be evaluated when the expected return of the portfolio is known. | ReturnCML - allow the expected return of a portfolio on the CML to be evaluated when the total risk of the portfolio is known. | Weight2Risk - allows the risk of a portfolio on the CML to be evaluated when the weight of the Market Portfolio within the CML portfolio is known.