hi Guys,

With respect to selecting corner port - for ex: if return is 8.5% - which port do u select?

Exhibit 1: Corner Portfolios given PARIN’s Capital Market Expectations Corner Portfolio Expected Return Standard Deviation Sharpe Ratio A 9.90% 16.66% 0.517 B 8.71% 13.20% 0.650 C 7.50% 13.00% 0.635 D 6.24% 7.8% 0.612 E 5.50% 6.5% 0.600

- To my understanding its between B anD C, but FInquiz solution is taking B with risk free rate becasue it takes it consideration sharpe ratio.
- we take highest sharpe ratio and tangency port when we borrow or led at RFR?

Can anyone clarify the application of point 1 and 2 and in which situations please?

Thanks in advance,

Swetha

B has highest Sharpe. Thus if leveraging is constrained, you should allocate between B and C. Portfolios should be adjacent.

there is no leverage constraint, but solution choose B giving highest sharpe ratio, which I feel is incorrect

It’s not incorrect according to capital market theory. It has the highest Sharpe Ratio thus is most likely to be the tangency portfolio, and meets the investor’s return requirement. Usually there will be more information in a case that might make investing only in the tangency portfolio not an option, such as a constraint against leverage or a certain percentage in cash is required.

If no leverage constraint invest over 100% in portfolio B (the one with highest Sharpe) while borrowing remainder at RF (negative weight), thus net invested 100 % into the most optimal asset weighted portfolio on CML.