The Markowitz Portfolio Selection Model Security Selection

We can generalize the portfolio construction problem to the case of many risky securities and a risk-free asset. As in the two risky assets example, the problem has three parts. First, we identify the risk-return combinations available from the set of risky assets. Next, we identify the optimal portfolio of risky assets by finding the portfolio weights that result in the steepest CAL. Finally, we choose an appropriate complete portfolio by mixing the risk-free asset with the optimal risky portfolio. Before describing the process in detail, let us first present an overview.

The first step is to determine the risk-return opportunities available to the investor. These are summarized by the minimum-variance frontier of risky assets. This frontier is


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