Tangency portfolio
The risky portfolio where a line from the risk-free rate just touches the efficient frontier. It has the highest Sharpe ratio available, so investors sharing the same expectations all hold it.
Where you will meet it
Tangency portfolio appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Explain what adding a risk-free asset does, and the capital allocation line
“The steepest such line, tangent to the efficient frontier, dominates every other combination: its slope is the Sharpe ratio of the tangency portfolio.”
- Explain the market portfolio and the idea of two-fund separation
“The first answer is the same for every investor who shares the same expectations and can borrow and lend at the risk-free rate — the tangency portfolio.”
See also
Efficient frontier · Risk-free rate · Sharpe ratio
Practise it
Practise tangency portfolio until it is automatic: questions that explain every wrong option.
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