Straight out of the CFAI text: “From the context, it will be obvious which perspective is being taken. The term ‘risk-free rate’ suggests a single-period perspective; a reported positive standard deviation for cash equivalents suggests a multiperiod perspective.” (Level III Volume 3 Capital Market Expectations, Market Valuation, and Asset Allocation, 4th Edition. Pearson Learning Solutions p. 258). In other words, I read this to mean if they give us a risk free rate, we should be combining the Rf rate with the portfolio with the greatest Sharpe ratio. Otherwise, we should be combining the two corner portfolios which bound the expected/required return. I hope, as the text suggests, that we would be given a standard deviation for cash equivalents or told explicitly that we are working with a multiperiod perspective, because it’s always possible to calculate the Rf rate with the expected return, std. dev., and Sharpe ratio.
yeah i think the test would be pretty explicit. i think corner portfolios were on last year’s exam. they def if you have the AM exams going back 5 or 6 years are a favorite type question ,but typically they’ve been fairly straight fwd. if you review old AM exams and EOC’s, my guess is you’ll have all of the firepower necessary to conquer a Q on corner portfolios of they show up on the AM this year again.
Im not sure what the hell your talking about… If they tell you that short selling is prohibited, or leverage is prohibited, use corner, if it’s allowed, use risk free. Done.
markCFAIL Wrote: ------------------------------------------------------- > If they tell you that short selling is prohibited, > or leverage is prohibited, use corner, if it’s > allowed, use risk free. > > Done. Well, even if short-selling and leverage are both prohibited, it seems reasonable that you could still find less risk for the required return if the highest Sharpe ratio portfolio was above the required return. It wouldn’t be using leverage just to combine this portfolio with the risk free rate. The only real justification to using two corner portfolios should be either: 1. a std. deviation given for cash equivalents or 2. the problem specifically stating a multiperiod perspective OR, in the event that the highest Sharpe ratio is below the return you need, 3. a unique circumstance specifying no borrowing. Simply omitting the Rf rate in the question doesn’t imply you can’t calculate it from the other data given and shouldn’t use it. My point was just that the curriculum explicitly said “it should be obvious.”
You are spending way too much time over thinking this one. Is it better to be right in theory, or right on the exam? If you use leverage, combined the tangency (highest sharpe) with risk free, if you can’t use leverage (short) - use corners that envelope the req return.
markCFAIL Wrote: ------------------------------------------------------- > You are spending way too much time over thinking > this one. Is it better to be right in theory, or > right on the exam? > > If you use leverage, combined the tangency > (highest sharpe) with risk free, if you can’t use > leverage (short) - use corners that envelope the > req return. This