2016 AM Question 4-B Corner Portfolio's

CFA Level III
#1

Can someone please explain why the correct answer doesn’t use the following formula? If you are choosing the portfolio with the highest sharpe ratio and using leverage at the risk free rate to get a target return above that, shouldn’t the use of leverage be a negative (or cost) to the portfolio? The correct answer had the use of leverage of the risk free rate as positive .50

I thought the correct formula would be = (7.65)(1-W) + (-0.50)(W)

#2

remember that on the Capital Allocation line if you are to the left of the tangent portfolio you are lending at the risk free, and if you are to the right you borrowing.

At the preset, we don’t know if we are lending or borrowing, thats why we calculate the weights. Also, if we are borrowing, the return isn’t negative, only the weight is.

Hope this helps and good luck!

#3

That does, Thanks.