Is there a way to find the portfolio with the highest Sharpe ration on the Efficient Frontier, besides just trail and error? If it is just trial and error, then I don’t suppose we will be tested on finding it, probably just interpreting it.
At least they should provide the risk free rate and the equation of the efficient frontier.
ya jonly is right. you need calculus i think
if you have the risk free rate (sharpe ratio cannot be computed without a risk free asset), the portfolio with max sharpe is simply the tangent (market) portfolio sharpe ratio = (Rp-Rf) / stdev = slope of the CML this slope is max for the tangent portfolio
That’s incorrect. Look at the formula you supplied, that will not change regardless of any portfolio on the CML.
oz001 Wrote: ------------------------------------------------------- > if you have the risk free rate (sharpe ratio > cannot be computed without a risk free asset), the > portfolio with max sharpe is simply the tangent > (market) portfolio > > sharpe ratio = (Rp-Rf) / stdev = slope of the CML > > this slope is max for the tangent portfolio It is not CML because the portfolio is not market portfolio. Agree with the tangent is the highest reward-to-risk ratio
yes Vid, all portfolios on the CML will have the same sharpe ratio and no portfolio on the CML mean variance dominates another, they just differ in terms of risk. but the original q pertains to the portfolio with highest sharpe on the EF. only the tangent portfolio on the CML lies on the EF. other CML portfolios, although same sharpe, do not lie on the EF. in fact thats what active management (ref Treynor Black) tries to do - increase the CML slope i.e. higher sharpe by identifying a different tangent portfolio.