# Vol 3 Asset allocation Que 9

Ques 9 does not specify that short selling or borrowing is not allowed

So IMO, SAA should be created with Corner portfolio 3 (#4 is the tangency portfolio but it doesnt meet the return objective so can be ignored) & risk free asset.

Any idea, why still corner portfolio 3 & 4 ares used?

On more Ques 12…value of log 10…how to to get it done on BA II plus calculator?

do you really need to do LOG(10)?

Log (10) = 1

has the cfa exam ever included ln/log stuff?? i dont remember any in l2…

of course it does. it is included in the chapter you have not done alladin [I should clarify thus far, because next thing you are going to do it, by the powers vested in me …]

(the cash and carry and reverse cash and carry ) where ln is used in the formula for determining the lease rate. just saying.

thnx for the response

cpk, can u help me solving ques EOCs - 9 & 12.

log10(630,000) = 5.8…how did this arrive?

Also que 9 doesn’t specify that short selling is prohibited. I remember that if short selling is allowed we should use the tangency portfolio & risk free asset. #4 is a tangency portfolio but it doesn’t meet the return objective so we should move to 3 then combine it with risk free asset.

Here Corner # 3 & risk free asset will do the job, is anything missed?

log(630000) to base 10 = ln(630000)/ln(10) which gives 5.799999

Q9. is for a foundation. and they say "borrowing is not permitted’. So definitely short selling is not allowed.

the solution is right - in that CPs 3 and 4 should be combined in proportion to arrive at the 6.29 multiplicative return requirement.

Many thanks!

arghh

If short delling was allowed you WOULD use corner portfolio #4 since it is the tangency portfolio, even though it does not meet the return requirement. The thinking here is that it produces the highest return/risk ratio and by leveraging that at the risk free rate you can produce the return that you need.

I dont have the problem in front of me but I bet if you compare the sharpe ratio of the combined corners 3 and 4 it will be greater than combining 3 and the RF asset.

It is really as simple as this: if you can borrow (leveage) use the RF and the tangency port (highest sharpe). If you cannot borrow, use the two corners that envelope the required return.

Done.

^Mark, I agree!

Ok so if leveraging/borrowing is allowed so you would always use the tangency portfolio (highest sharpe) then combine it with risk free.

Incase return reuirement is more than the one on tangency portfolio, amount will be borrowed to invest more than 100% in tangency portfolio to generate required.

Incase return req is less than the one offered by tangency portfolio, part of the funds will be invested in tangency & part will be in risk free.

thnx!

Correct.

This part is correct for a portfolio with a no borrowing constraint.

Pls read page no 259 Vol3, 3rd para

If you say that it is correct for no borrowing constraint, then when do we use two adjacent cps?

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Sorry rahuls, I read “In case return requirement is higher than tangency portfolio.” In the case you mentioned I believe you would use the two corner portfolios whose expected returns surround your return requirement.

For asset allocation questions, I’ve never used the Rfr when the required return is attainable by combining corner portfolios. I don’t really know why, it seems that you would be creating a portfolio with lower risk if you did. But combining corner portfolios seems to be the standard for these questions.

ok…thnx

ok so does everyone agree that with no constraints you combine RF asset and highest sharpe portfolio and if there are constraints combine the 2 portfolios whos returns surround your return?

Hi Rahul can u explain me q 27’28,29 from Schweser practice exam book 2 exam 1 afternoon session.