Choosing the optimal risky portfolio?

my two pennies: Y does not lie on the Markowitz efficient frontier. so it isn’t achievable without leverage on the risk-free rate.
Y would be the lowest-risk portfolio for an investor with a target return of Y.
Without leverage he would only be able to achieve X.
 
Yes, portfolio Y is only achievable borrowing at the risk-free rate, so you invest more than 100% of your capital in the risky portfolio.
 
I don;t think its irrelevant, Y is more risky than P but has a higher return (same risk/return ignoring financing costs as any other point on the line).
 
burberryjam wrote:I don;t think its irrelevant, Y is more risky than P but has a higher return (same risk/return ignoring financing costs as any other point on the line).
Click to expand...
The fact that Y has higher risk & return than P is, by itself, irrelevant. P has higher risk & return than A; if higher risk & return made a portfolio suboptimal, P also wouldn’t be the optimal portfolio.
P is a (100%) risky portfolio. Y is part risky portfolio, part risk-free portfolio, not a (pure, 100%) risky portfolio. That’s the point.
 
OK, noted. Tangency of Markowitz’ s frontier through P is also irrelevant or not?
 
there is no better combination of all risky assets than P. There is only one optimal risky portfolio, P.
by combining with risk-free asset you get the tangency line to adjust to an investor’s risk aversion
 
Yes, so far I’ve been teached such but there is a bit confusion in understanding S2000’s explanations to me, NHF.
 
Flashback wrote:OK, noted. Tangency of Markowitz’ s frontier through P is also irrelevant or not?
Click to expand...
Nope: it’s relevant, because it creates the CML. It’s the (purely) risky portfolio with the highest Sharpe ratio.
 
Flashback wrote:Yes, so far I’ve been teached such but there is a bit confusion in understanding S2000’s explanations to me, NHF.
Click to expand...
I’m sorry to hear that: I want all of my explanations to be crystal clear, no confusion at all.
 
S2000magician wrote:
burberryjam wrote:I don;t think its irrelevant, Y is more risky than P but has a higher return (same risk/return ignoring financing costs as any other point on the line).
Click to expand...
The fact that Y has higher risk & return than P is, by itself, irrelevant. P has higher risk & return than A; if higher risk & return made a portfolio suboptimal, P also wouldn’t be the optimal portfolio.
P is a (100%) risky portfolio. Y is part risky portfolio, part risk-free portfolio, not a (pure, 100%) risky portfolio. That’s the point.
Click to expand...
I am confused by the statement I have highlighted. I thought Y was a leveraged portfolio meaning it is basically P with even more risky assests added by borrowing at the risk free rate.
 
KMeriwetherD wrote:
S2000magician wrote:
burberryjam wrote:I don;t think its irrelevant, Y is more risky than P but has a higher return (same risk/return ignoring financing costs as any other point on the line).
Click to expand...
The fact that Y has higher risk & return than P is, by itself, irrelevant. P has higher risk & return than A; if higher risk & return made a portfolio suboptimal, P also wouldn’t be the optimal portfolio.
P is a (100%) risky portfolio. Y is part risky portfolio, part risk-free portfolio, not a (pure, 100%) risky portfolio. That’s the point.
Click to expand...
I am confused by the statement I have highlighted. I thought Y was a leveraged portfolio meaning it is basically P with even more risky assests added by borrowing at the risk free rate.
Click to expand...
It is. Nobody’s suggesting that it isn’t riskier than P.
But it includes shorting the risk-free asset; that portion of the portfolio isn’t risky.
 
You must log in or register to reply here.
Back
Top