We invest in the corner portfolio with an expected return above our target return that has the highest sharpe ratio and combine that corner portfolio with investment in the risk-free rate when we want to find the Tangency Portfolio, correct?
Yes!! If your required rate of return is higher than the rate of return on your corner (the one with the higest sharpe) and shorting is NOT allowed, then you have to find the corner portfolios that sandwich the require rate of return.
remember if leverage is allowed, you should move on CAL only
maybe I’m not understanding the question, but you don’t mix the RF asset w/ a “combined corner portfolio” that’s above the tangency if your required rate is above the tangency…you just use the combined corner portfolio…that’s it.
No I think when leverage is allowed you use the corner with the highest sharp whilst borrowing at the RF rate.
yes, MGG is correct
I am not sure I get it either: If risk free asset is not available, Select the two portfolios that are on either side of the required rate of return. Find out the weights of each. If RF is available, use the portfolio with the highest SR and combine it with RF asset to get the weight of asset class. Is there more to it that what I have stated?
Thats about it, now calculate it!
I agree that you combine the RF asset w/ the tangency portfolio, or leverage it up. But, if your required return is higher than the tangency, you can’t combine w/ RF (unless you can short sell), so you just weight the 2 portfolios that straddle your required return. if you combined w/ RF, you would dip under the EF and the portfolio would not be optimal.
Not that I’m any expert on this, but my understanding falls in line with prockets.