Why in answering this question they choose 2 new corner portfolios? On previous page (p.162) it says “… If the IPS specifically prohibits borrowing, then we select a different portfolio as tangency portfolio.The new tangency portfolio will be the one thith the highest Sharpe ratio that has the expected return at least equal to the investor’s required rate of return…” Shouldn’t in this case we choose portfolio 4 and combine it with RFR?
If you select portfolio 4 as tangency and combine it with Rf asset, your resulting portfolio has lower Sharper ratio (you can solve and see). Not sure though if that’s what we’re supposed to do on the exam - solve using both methods and compare Sharper ratios.
I reread CFA readings and also got some answer from Schweser “If the expected return on the tangency portfolio is less than the required return and you are not allowed to use leverage, you can’t use the risk free asset and you can’t get up on the CAL. You will have to combine two corner portfolios to the right of the tangency portfolio on the efficient frontier. Note that this is sub-optimal from a risk/return perspective because you end up with a lower Sharpe ratio than available on the CAL.”
Hmm, interesting. So, Schweser’s point of choosing another tangency portfolio (what you quoted above from p.162) is totally useless?
it seems that way. i am tired. on top of covering all this material you also have to figure out errors both by Schweser and CFAI Tanyusha, otkuda ti?
moskva, new york. and u?
nice to see fellow russians studying for L3:) moskva, DC here
Vilnius, Toronto here…
kishinev, los angeles