WEBVTT

00:00.900 --> 00:05.820
And the last video we have seen that the tangled line from the risk free asset to the efficient frontier

00:06.120 --> 00:12.570
links the risk free asset and the max Sharpe Ratio portfolio and the graphical intuition of the sharp

00:12.570 --> 00:20.220
ratio is that the sap ratio is the slope of these lines and the slope can be maximized by drawing the

00:20.220 --> 00:21.580
tank end.

00:21.690 --> 00:28.260
And in portfolio theory the tank end is also called the capital market line and the capital market line

00:28.260 --> 00:33.120
includes the set of all efficient or optimal portfolios.

00:33.150 --> 00:39.090
So given a certain amount of risks of for example 10 percent you can find the portfolio with the highest

00:39.090 --> 00:41.200
return on the capital market line.

00:41.220 --> 00:48.570
So here and given a certain return level for example here 10 percent you can find the portfolio with

00:48.660 --> 00:49.770
the lowest risk.

00:49.770 --> 00:53.370
Also on the capital market line so here.

00:53.570 --> 00:59.900
Now the important question is what are the constituents of the portfolios on the capital market line.

00:59.900 --> 01:06.800
And actually each and every portfolio here on the capital market line consists of the risk free asset

01:07.190 --> 01:13.640
and Max Sharpe Ratio portfolio and therefore the implication is that each and every investor should

01:13.640 --> 01:22.250
hold a combination of the risk free asset and the maximum Sharpe Ratio portfolio and depending on our

01:22.250 --> 01:28.370
risk appetite we would choose rather a high proportion of the risk free asset or we would choose a high

01:28.370 --> 01:30.890
proportion of the max Sharpe racial portfolio.

01:30.890 --> 01:37.520
So maybe you would we would end up at the capital market line somewhere here and in any case it's inefficient

01:37.520 --> 01:40.680
to hold any other portfolio here.

01:40.700 --> 01:46.820
So as I said on the capital market line we can find all combinations of the risk free asset and the

01:46.820 --> 01:53.390
max Sharpe Ratio portfolio and let's have a look at some cases here so the extreme case would appear

01:53.810 --> 02:00.740
to be fully invested in the risk free asset with zero proportion and the max operational portfolio and

02:00.740 --> 02:08.240
the other extreme case would be to fully invest in the MAX operator portfolio and the zero percent in

02:08.240 --> 02:12.710
the risk free asset and then actually all other combinations are in between.

02:12.710 --> 02:20.270
So for example here in the middle we have the 50 50 portfolio and again all portfolios on the capital

02:20.270 --> 02:26.450
market line only consists of a combination of the risk free asset and the max Sharpe Ratio portfolio

02:26.930 --> 02:32.510
and therefore this concept is also called the two fund theorem.

02:32.780 --> 02:38.150
So it's most efficient to only invest in these two funds portfolios.

02:38.420 --> 02:43.430
And again depending on your risk appetite you can choose either to have a high proportion of risk free

02:43.430 --> 02:49.610
asset or a low proportion of the risk free asset and in any case you should only hold the risk free

02:49.610 --> 02:55.060
asset and the max Sharpe Ratio portfolio and therefore the max operational portfolios.

02:55.070 --> 03:00.520
Also called in finance this theory the market portfolio.

03:00.560 --> 03:01.030
All right.

03:01.040 --> 03:06.860
This is enough theory for the time being and I hope to see you also in the next the coding lecture by.