Asset Allocation

Markowitz mean–variance objective

Choose weights w to minimize variance wᵀΣw subject to a target expected return wᵀμ = μ* and Σwᵢ = 1. Trade-off between e

Efficient frontier

The set of portfolios that maximize expected return for each level of variance (or minimize variance for each level of e

Two-fund separation theorem

Without a risk-free asset, every mean–variance efficient portfolio is a linear combination of any two distinct efficient

One-fund (tangency) separation theorem

With a risk-free asset, every efficient portfolio is a mix of the risk-free asset and one risky tangency portfolio (max

Capital market line (CML)

E[Rₚ] = Rf + ((E[Rₘ] − Rf)/σₘ) · σₚ. The CML connects the risk-free asset to the market (tangency) portfolio; its slope