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Show that any portfolio on the Capital Market Line (CML) with a positive weight in the...

Show that any portfolio on the Capital Market Line (CML) with a positive weight in the market portfolio is perfectly correlated with the market portfolio. Interpret this result.

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Answer #1

The beta of a portfolio

Consider a portfolio containing n assets with weights W1, W2, · · · , Wn.

Since rP = ,

cov(rp, rm) =

When βi = 1, ri = rM.

A risky asset which is perfectly correlated with the market portfolio has the same expected rate of return as that of the market portfolio.

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