The form of reducing the efficient shadow different assumptions about short sales and lending and borrowing risk-free

Abstract

Most securities available for investment have uncertain outcomes and are thus risky. The basic problem facing each investor is to determine which particular risky securities to own. Because a portfolio is a collection of securities, this problem is equivalent to the investor selecting the optimal portfolio from a set of possible portfolios. Hence, this situation is often referred to as the portfolio selection problem. Many trails were to find solution to this problem, begins with the complicated ideas of Markowitz, passing through the contributions of Tobin, Sharpe, & Lintner, and ending with the most modern simplification approaches. Markowitz's ideas are led to derivation of efficient frontier subject to a set of the extreme assumptions, especially in the respect to short selling & riskless lending and borrowing. Thus, this paper is aimed to derive the efficient frontier subject to a different original extreme & most reality alternative assumptions. This paper is reached to many conclusions, most important among them is that an efficient frontier takes a different shapes subject to the different assumptions in the respect of investors' ability to sell short & to riskless lending and borrowing. The set of efficient portfolio opportunities available for investor is expanded when allowed for him to exercise short selling and his efficient frontier takes a concave curve shape with open upper end in contrast to the Markowitz's efficient frontier curve with both ends closed (minimum variance portfolio – maximum return portfolio). Adding of riskless asset to the components of investor's portfolio is represent a new opportunities expanding the feasible set significantly and, more important, changes the location & shape of substantial part of Markowitz's efficient frontier. The paper is approached to many recommendations, most important among them is necessity to educate the investors' population, in the Iraqi stock exchange, about the real shape of their efficient frontier which they faced in their environment