Corner Portfolio vs RF Asset???

[calvinoh]

who pulled up this thread lol its so tempting

[verse214]

@Nuggies

If borrowing is not allowed and you’re required return is greater than the expected return of the corner portfolio with the highest sharpe ratio, you need to find the two corner portfolios that “sandwich” the required return. You will be somewhere along the mean variance frontier (and above the global minimum).

However, if borrowing is allowed and, for argument sake, the required return is actually below the expected return offered by the corner portfolio with the highest sharpe ratio, then the optimum portfolio will be some combination of the risk free rate and the corner portfolio with the highest sharpe ratio. The optimal portfolio will be somewhere along the CAL.

Similarly, if borrowing is still allowed but the required return is greater than the expected return of the corner portfolio with the highest sharpe, you would borrow against the risk free rate and invest more in the aforementioned corner portfolio (highest sharpe portfolio). You will still be on the CAL though but the line will simply extend further to the right past the tangent point at the same slope.

Not sure if that’s right but that is my current understanding.

Only error here is that the optimal portfolio will be somwhere along the CML not the CAL.