I understand that if you are not allowed to borrow, then you may not be able to use the tangency portfolio to calculate your allocation assuming your desired return is above the tangency portfolio’s return.
But what if your return goal is below the desired return and there’s no constraint against LENDING? Only against borrowing. In which case, should we still be using corner portfolios or should we do risk free asset + tangency portfolio?
EDIT: In my notes I have that the market portfolio is always a corner protfolio, and I thought that it would be the portfolio with the highest sharpe ratio, but after checking it seems it is the tangency portfolio which has the highest Sharpe.
Ok, so I checked the CFAI text and it’s actually the GMV portfolio that is always a corner portfolio.
According to GoStudy, in their section about corner portfolios they say “note that the tangency portfolio is the portfolio with the highest Sharpe ratio. It’s the portfolio closest to the market portfolio and the exam will often ask you to ID it.” Which would imply to me that the tangency portfolio is always corner portfolio.
Now I am more confused about this now than I thought.
I did not pull it out of context. I think what he wanted to get across is exactly what he said, essentially if the exam asks you to ID the tangency portfolio in the list of corner portfolios, it’s the one with the highest sharpe ratio.
He is wrong, the MP is not the one closest to the tangency, it is the tangent portflio. I do not also like the synonym of tangency and highest sharpe ratio. ID’ing the CP with the highest sharpe ratio is not a tanget, but the closest to the tangent. This is how the question should come to you in the exam.