CFA bk 3 example 10 page 264.
Did I miss something in the vignette? How do I tell this one is unconstrained and we use Tbills and the tangency portfolio?
CFA bk 3 example 10 page 264.
Did I miss something in the vignette? How do I tell this one is unconstrained and we use Tbills and the tangency portfolio?
coz of two conditions:
Std dev is acceptable when it is equal to 12% or less
Minimize the probability of return falling below spending rate (i.e. 4%)
We always use CP4 & try to lower the std dev mixing it with risk free.
If our return objective is below the return offered by tangency portfolioâ€¦we need not worry abt borrowing or shorting constraint. To satisfy return obj, we need to invest partially in tangency portfolio & risk free.
When tangency portfolio return is less than return objective than only we may require to go short & over invest in tangency portfolio. If borrowing is constrained then we go for corner portfolio between which lies our return.
Tangency portfoli :Corner 4 meet the return as well as std dev objeective. We chose 4. But then there is a possibility to lower the std dev without lowering sharpe ratio.