Positive Weights on the Efficient Frontier

37 Pages Posted: 9 Oct 2012

See all articles by Phelim P. Boyle

Phelim P. Boyle

Wilfrid Laurier University - School of Business & Economics; University of Waterloo

Date Written: October 9, 2012

Abstract

One of the fundamental insights of the CAPM is that the market portfolio is mean variance efficient. Since the market portfolio has positive weights on all assets, the conditions under which frontier portfolios have this property are of interest. This paper derives a simple explicit solution for an efficient portfolio with positive weights. Assuming the covariance matrix is given, we obtain an expected return vector such that there is a compatible frontier portfolio. This portfolio is derived from the dominant eigenvector of the correlation matrix and provides a proxy for the market portfolio. Examples are provided to illustrate the basic idea.

Keywords: Efficient frontier, Positive weights, Compatible expected return

JEL Classification: G11, G12

Suggested Citation

Boyle, Phelim P., Positive Weights on the Efficient Frontier (October 9, 2012). Available at SSRN: https://ssrn.com/abstract=2159445 or http://dx.doi.org/10.2139/ssrn.2159445

Phelim P. Boyle (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada
519 884 1970 (Phone)
519 888 1015 (Fax)

University of Waterloo

Waterloo, Ontario N2L 3G1
Canada

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