corner portfolios and leverage

watch out for this… if the investor cannot borrow than you will do corner portfolios or use the CAL using risk free and tangent portfolio. If borrwoing is allowed then use the CAL- borrowing the risk free and leveraging the tangent portfolio.

just sayin

That is a little confusing the way you wrote it. My understanding is:

Cannot borrow = corner portfolios

Can borrow = borrow @ rf and invest only in tangent portfolio

if the expected return is less than the tangency portfolio, then u can combine rfr with tangency portfolio even if borrowing is not allowed

can short = highest sharpe if appropriate

no shorts = corner it baby

yup and highest sharpe is tngency port

oh wow didnt remember that. so first we need to check if tangency portfolio covers return? i thought we check if its constrained or not and then if constrained use corner porfolios otherwise use rfr with highest sharpe portfolio?

This is the easiest part of the curriculum. My wet dream is to open the bok and see nothing but corner portfolio problems and some endowment return calcs.

If you cannot short/borrow, but highest sharpe portfolio has a return sufficient enough to meet your needed return, you invest in that and the rest in the RFR. It doesnt matter that you cant borrow. If the highest sharpe doesnt give you enough return, thats when you corner it.

If you can borrow, you borrow and use the highest sharpe if the return is too low, if not then its highest sharpe and RFR.

I agree with markCFAIL - would love to have a morning question worht like 25 points on this

Actually i just noticed the point of this post, I also forgot that fine detail. It makes total sense, I just don’t remember running into this before. Thanks for the heads up.

Oh and spanish – this and how bout some core capital problems for tons of points? Oh yah, i think I can multiply some shit.

Yea that woudl be sweet (although I messed the core capital up in the live schweser by discounting by the RFR instead opf the real return of 2%. oops).

Maybe a nice dollar duration rebalancing ratio too? And some Fed Model in there, and were looking good (and a MPS of like 80 haha)

i think i got it…with constraints you look at highest sharpe, if its higher than required return you combine that with RFR if its less then you use corner porfolios…without constraints you combine highest sharpe with RFR in either case and if return is less than required you borrow at RFR if return is higher than required you dont borrow but still use highest sharpe and RFR

thanks for the help!!

you cannot borrow if shorting is prevented and the tangency portfolio does not have enough return to cover your need.

I probably am missing this - or am not seeing it written like this.

Please confirm, somebody.

you got it right cpk

if you can’t borrow you see if highest sharpe portfolio offers a higher return than required, if it does you combine that with RFR, if the return is less than required you use 2 corner portfolios around the required return to calculate the weights.

for non constrained you always combine highest sharpe with RFR (you will borrow if required return is less than highest sharpe protfolio return)


thanks igor.

My ideal morning:

Simple individual return calc. Would love it both ways (spending need & IRR)

Couple of layup tax q’s

Endowment or Pension IPS q

Followed by a question where you have to choose the right portfolio based on a set of rules

Corner portfolio q for like 25 points

A rebalancing with futures question

An attribution question that doesn’t have a global benchmark for like 25 points

core capital would be nice

And an easy CME question that was just testing a bunch of formulas

Refer to Morning 2008, question 4. They are still borrowing when req return is 9.4 and return on port is 9.1 so I dont think what you mentioned above still holds. Can anyone explain more though?

in Part B -

“Beveridge proposes that the IPS be changed to allow borrowing or lending at the risk-free rate, currently 4.5 percent”

Hence it’s a combination of tangency portfolio (# 4 & RFR) along the frontier on the Capital Allocation line

I know, but i was referring to this one:

for non constrained you always combine highest sharpe with RFR (you will borrow if required return is less than highest sharpe protfolio return)

you will borrow if required return is less than highest sharpe portfolio return < - its not the case here. Any help is appreciated :slight_smile:

good post.

if borrowing/shorting not allowed and if highest sharpe ratio portfolio covers the required return, we can just use that portfolio + investment in RFR insted of cornor portfolios

Does CFAI provide/mention any example of above scenario?