CFAI pages 264 and example 10 on page 268 IN example 9, they matched the required return with mixing two corner portfolios In example 10, they just picked one portfolio that just exceed the required return. When do you use either?
Depends if you can short or use leverage. If you can’t short, use the two corner portfolios. If you can short and use leverage, use one portfolio and either lever up the portfolio using the risk free rate, or allocate part of the portfolio to the risk free rate and the rest to a corner portfolio.
In choosing which portfolio to use to combine with the risk free asset (when you can lend or borrow), go with the one with the higher Sharpe ratio.
If you choose to lend, you effectively reducing returns. If you choose to borrow, you effectively enhancing returns, depends on the return objective. So it all comes down to is the return objective. Not sure I am right…
CautiouslyOptimistic Wrote: ------------------------------------------------------- > Depends if you can short or use leverage. If you > can’t short, use the two corner portfolios. If > you can short and use leverage, use one portfolio > and either lever up the portfolio using the risk > free rate, or allocate part of the portfolio to > the risk free rate and the rest to a corner > portfolio. If you’re wondering when to (1) Mix a corner portfolio with the RF asset or (2) Mix two adjacent corner portfolios, the inquiry has been answered right there.