Asset Allocation - Corner Portfolios

Hi Friends, Did you get the logic behind example 10 on Page number 246 of CFAI text volume 3? I fail to understand why they didnt consider the Portfolio 4 and 5 combination to come up with strategic asset allocation. Why did they ignore portfolio 5 here? I actually thought that we should be using a combo of 4&5 to come with weights since they bracket the return requirement of the PF. But they have gone for the tangential PF which maximizes the Sharpe Ratio… Could you please let me know your thoughts? Cheers!

Did you get the logic behind example 10 on Page number 246 of CFAI text volume 3? I fail to understand why they didnt consider the Portfolio 4 and 5 combination to come up with strategic asset allocation. Why did they ignore portfolio 5 here? I actually thought that we should be using a combo of 4&5 to come with weights since they bracket the return requirement of the PF. But they have gone for the tangential PF which maximizes the Sharpe Ratio…

There are no constraints placed on the portfolio in the example, so when we are talking about maximizing risk adjusted returns its sharpe ratio…

if there are no constraints you take highest tangency portfolio with the risk free rate since now you can go short.

If there are no constraints against short selling, corner portfolios don’t matter.