# Corner Portfolios - Reading #25

Ok - can someone please explain to me in layman’s terms two things about Corner Portfolios: (1) How do they determine which portfolio gets classified as a ‘CORNER PORTFOLIO’ - for example, in the CFAI readings - Reading #25 Bk 3 Pg 208-209- Exhibit 9, 10, 11 - How did they select Portfolios 1-7 as being THE ‘Corner Portfolios’? Why couldn’t it have been any other portfolio on that line (like the ones where we do a weighting between the two?) (2) Why the constraint on SHORT SALES? Please keep the answers so simple that I could explain it to my 3 year old… my brain is burned out… DM

For exam purposes, I expect that info to be given: they will provide you with the list of corner portfolios, and they will tell you if there is a constraint or not on short sales I have not seen many exercises as you said, where the info is not provided… Hope I am right, by the way…

1. A corner portfolio is a portfolio in which one of the assets in the portfolio goes from Zero to Postiive weight or from a Positive Weight to Zero, loosely defined. The Corner Portfolio with the Highest Sharpe ratio is the Tangent Portfolio. Since this has the Highest Return per unit of Risk you want to combine either A) Another close corner portfolio with it or B) Combine the Risk Free asset with the Tangent. 2) There is a constraint on Short Sales because not every investor can Short Stock. Majority of institutional portfolios have a constraint against short selling and many individuals dont have the expertise to Short. Shorting is not as easy as people may think it is.

Data_Monkey Wrote: ------------------------------------------------------- > Ok - can someone please explain to me in layman’s > terms two things about Corner Portfolios: > > (1) How do they determine which portfolio gets > classified as a ‘CORNER PORTFOLIO’ - for example, > in the CFAI readings - Reading #25 Bk 3 Pg > 208-209- Exhibit 9, 10, 11 - How did they select > Portfolios 1-7 as being THE ‘Corner Portfolios’? > Why couldn’t it have been any other portfolio on > that line (like the ones where we do a weighting > between the two?) As mentioned by hala_madrid, the exam WILL simply provide the corner portfolios. If you really want to know how to arrive at the corner portfolios, fineprint 32 on p.208 has got the answer for you — there are “various algorithms” out there - sticky

It’s just quadratic programming…like linear programming on steroids.