Portfolios: Riskless Borrowing and Lending

Professor David Hillier, University of Strathclyde;
Short videos for students of my Finance Textbooks, Corporate Finance and Fundamentals of Corporate Finance
Check out www.david-hillier.com for my personal website.

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[@c1inward346]

Professor David, very well explained thank you. I was going in circle with the whole concept of borrowing and lending at the risk free rate turns out its only common sense. When invoking borrowing at the risk free-rate, you effectively invest more on equity making your portfolios having high risk but a rewarding return. Vice versa when lending at the risk free-rate.

[@adityaverma5297]

Thanks so much- I tried reading some books to understand the market line concept, but this actually helped put things into perspective, great video!

[@faizanakbani9333]

Great explanation, very clear and simple.

[@TriNguyen-xi8ji]

Thank you a lot for your helpful video!

[@anthonyclare2050]

This is a super video and very clear explanation - thank you

[@davidhillier9986]

Thanks for the kind words, Anthony!

[@aisyh-1499]

This is so much clearer. Thank you so much :)

[@asurmoreyra4337]

Many thanks for the explanation. It was quiet clear.

[@davidhillier9986]

It's a pleasure, Asur.

[@davidhillier9986]

Hi, Jack. The optimal portfolio is the feasible portfolio that, in conjunction with the risk free asset, can deliver the highest expected return for the lowest level of risk. It is the portfolio that has the highest reward to risk ratio of every possible capital allocation line. This is the point at which the capital allocation line is tangent to the efficient frontier, and therefore becomes the capital market line. I hope this helps. David

[@davidhillier9986]

Hi, Jack. The conditions are: riskless borrowing and lending, everyone having the same views on expected returns and risk of all assets, no transaction costs, and the existence of a risk free asset. These are not likely to be applicable in the real world.

[@bli240]

Thanks for the overview. It definitely helped solidify the concepts. However, given that the risk free returns can be offered by government issued securities, is it possible for an investor (Mrs Bagwell in the example) to borrow at the risk free rate? In reality, I'd imagine that there would be a premium that would eat into her expected return of the portfolio.

[@Olivia-bt1kq]

so helpful! thankyou so much!

[@Leo-tf3rw]

is there an excel version of this?

[@osamaawwad1635]

thanx professor

[@kapild11]

its good David keep it up

[@juni6129]

How did you get the CML? I can see that to get Line 1 you just plot points where you have different weights between riskfree asset and security Q, but how did the CML come about? How do you "move the slope up" to maximise your returns for a given risk?

[@davidhillier9986]

I am being intuitive with my words to make it more accessible for a short video. If you check my textbooks, you will find the full derivation of the CML. It's a mathematical derivation - best read than watched!