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Optimal portfolio


Optimal portfolio for each investor is the point where her indifference curve is tangent to the efficient frontier.


Systematic Risk:

  • Non diversifiable
  • Investors get compensation for taking systematic risk

Non-Systematic Risk:

  • Company specific risk
  • Investors are not compensated for taking non-systematic risk



  • Uses total risk.
  • Produces the same portfolio ranking as that of Sharpe ratio.

Jensen's Alpha:

  • Uses systematic risk (b).
  • Measures the percentage return over that of a portfolio with the same beta.

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