feel like there’s gotta be an obvious answer here, but here goes: is there an easy way to set up the calculation for the weights of 2 corner portfolios to achieve the required return? I ask because I can’t seem to easily figure out which portfolio should be “w” and which should be “1-w” even though the math tends to work out either way. I thought the portfoio weighted “w” would be the portfolio with expected return closer to the required return. maybe I’m just tired…THANKS.
Go sequence wise. For example - portfolio 3 generally has greater expected return than portfolio 4 as they are arranged sequentially in the table. Consider portfolio 3 as W and portfolio as (1-W)
thanks - but if that’s not the case (as in the Schweser exam question I’m looking at) then just stick with the higher return portfolio as w, and the lower return portfolio as 1-w? thanks again. don’t know why this is giving me such a tough time.
I don’t think it should matter which one you chose as W and which you make w-1. Once you work out the formula, just multiply the weights times the expected return and see if it comes out right. If not, switch them around
thanks - it’s comforting to know I’m not the only one sitting at a desk up to my neck in Schweser while logged into AF at 10:23PM.
Aimee Wrote: ------------------------------------------------------- > I don’t think it should matter which one you chose > as W and which you make w-1. Once you work out the > formula, just multiply the weights times the > expected return and see if it comes out right. If > not, switch them around Exactly!
but sometimes it asks just for weights of portfolio 3 and 4 and you may get incorrect if you don’t pay attention here
Right, but my point was just that there isn’t a specific way you need to set up w and w-1, just as long as you keep your numbers straight (and multiplying them out is just an easy way to check for that).
Something called the “commutative law of multiplication” applies here. That and simple algebra should get you where you need to go.
Pupdawg is right…I’m having issues on this too. Sure you get the same expected return using weights one way or the other but if it asks on a specific weight you could get this question wrong. Any insight into this from this perspective?
Take W as first portfolio and (1-W) as second portfolio in sequence.
Aimee Wrote: ------------------------------------------------------- > Right, but my point was just that there isn’t a > specific way you need to set up w and w-1, just as > long as you keep your numbers straight (and > multiplying them out is just an easy way to check > for that). It doesn’t matter. The math works either way. You just have to know which portfolio you labeled with w and which with (1-w). That’s all.
yeah… the math works either way… just set them up corner 3 as w and corner 4 as w-1 everytime… (CP3return)(w) + (CP4return)(1-w) = total return you are looking for… If they ask for CP3, you just give them W because its sitting right next to CP3 return. If they ask for CP4, you give them 1-W because it is next to the CP4 return.
doesn’t matter which should be w or (1-w) its the same algrebric equation. Just plug and play if u don’t believe.
man i am praying that we see an entire item set dedicated to this… give me part A as no short sales, and part B as short sales… please please please put this on the exam
haha boston, i was thinking the same thing when i read this thread… I dont want part B to be short sales tho, id rather it be use a risk free asset with one of the 4 corner portolios…
Amen to that. I remember praying to seeing a triangular arbitrage problem on LII…if you knew how to do them it was easy, but it seemed to freak out lots of people.
Lol…I just got my ass handed to me on the 2008 morning session when I (drunkenly, in my defense) put the weight of the second term as (X-1). Don’t do that, kids.