How do we determine which weight to allocate to each corner portfolio, when performing the calculations? To explain, suppose we’ll have to allocate between 2 portfolios A & B, giving returns of 10.3% & 9.1% respectively. We expect return of 9.5%. How do we know the equation should be 9.5 = w*10.3 + (1-w)*9.1 and NOT 9.5 = (1-w)*10.3 + w*9.1 ??
Always target the weight of the portfolio with larger expected return only for convenience. The way you suggest you will find the w for 9.1 portfolio and end up with same weights.
Actually it doesn’t matter if you do it one way or the other Lets say A = has return 10.3 and B has return of 9.1 9.5 = 10.3w + 9.1(1-w) 9.5 = 10.3w + 9.1 - 9.1w .4 = 1.2w w = .33 – This would be invested in A 1-w = .67 – This would be invested in B 9.5 = 10.3(1-w) + 9.1w 9.5 = 10.3 - 10.3w + 9.1w -.8 = -1.2W w = .67 – This would be invested in B 1-w = .33 – This would be invested in A
What is our trigger for using the highest Sharpe ration portfolio and the RF free rate. I understand that this is the tangency, and if they give it to us it’s a trigger, but like would it only be in cases where req’d return is less than the tangency protfolio E® or what…I have sometimes confused this??
the cfai question i saw on this specificially mentioned the “tangency portfolio” rather than corner portfolios. If it says that then you want the one with the highest sharpe ratio.
that is correct one other case would be. if shorting (borrowing at risk-free rate) is allowed and your required return is higher than tangency portfolio, then you borrow at risk-free rate and combine with tangency portfolio
Merci
Leila30 Wrote: ------------------------------------------------------- > How do we determine which weight to allocate to > each corner portfolio, when performing the > calculations? To explain, suppose we’ll have to > allocate between 2 portfolios A & B, giving > returns of 10.3% & 9.1% respectively. We expect > return of 9.5%. > > How do we know the equation should be > > 9.5 = w*10.3 + (1-w)*9.1 > > and NOT 9.5 = (1-w)*10.3 + w*9.1 ?? It doesn’t matter which one you assign the W and 1-w as long as keep them distinct, they are specific variables and have specific places, so it doens’t matter if call one W and the 1-w or vica versa or one a and one b (where b =1-a)
I could have sworn I flipped them once and got different results… maybe it was due to my butter fingers…