I would lever the tangency portfolio in this case. Strangely CFAI works with combination of corner portfolios. Seems not the efficient solution…What you think??
If you read the under “tax considerations” of IPS, the client doesn’t want to borrow on margin, so lever the tangency portfolio is not possible in this case.
There is no section on “tax considerations” which seems logical because the client is a foundation. And even if, why should leverage considerations be found in the tax section? I checked also with CFAI and it was already pointed out to them: There is an Errata on this…
Yes you are right. I apologize; I was looking at example#9 on reading 26. In the practice problem #9 at the end of the book, the tangency portfolio doesn’t meet the return requirement so you could lever it to meet the return requirement. I don’t know why the CFAI didn’t do that. But on the exam, I wouldn’t add leverage to the portfolio unless it’s said so explicitly.
IRS-Trader Wrote: ------------------------------------------------------- > I checked also with CFAI and it was already pointed out to them: There is an Errata on > this… Any response from CFAI ? The fundamental issue is how to decide to lever/lend or to combine 2 corner portfolio. Unfortunately, there is not a clear rule in CFAI text. Actually, there are 4 scenarios : 1. Borrowing is allowed / TP’s expected return > Reuired return 2. Borrowing is allowed / TP’s expected return < Reuired return 3. Borrowing is not allowed / TP’s expected return > Reuired return 4. Borrowing is not allowed / TP’s expected return < Reuired return
Yes, check CFAI Errata - they added a 3 bullet point which says the foundation doesn’t want to borrow funds.
So, can I have following conclusion ? scenario 1 & 3 : TP + Lending at risk-free rate scenario 2 : TP + Borrowing at risk-free rate scenario 4 : combination of 2 corner portfolio (only applies to this scenario)
In the paragraph above Example 9 on P.264. The statements : ---- On the other hand, … as in Example 10, the highest-Sharpe-ratio efficient portfolio’s expected return may be BELOW the return objective. -------for the investor. Is it that scenario 4 applies ? Though the correct statements for Example 10 shall be “HIGHER than (not “BELOW”) the return objective”. On the other hand, the actual scenario in Example 10 is : TP’s expected return > Reuired return (not TP’s expected return < Reuired return as mentioned above) and borrowing is not prohibited. So, “TP + Lending at risk-free rate” shall apply if no constraint of Roy’s Safety First Ratio. Am I right ?
AMA Wrote: ------------------------------------------------------- > In the paragraph above Example 9 on P.264. The statements : Correction : In the paragraph above Example 10 on P.264.