Corner Portfolio vs RF Asset???

Should be like a levered bond portfolio.
(Tangent return - D * Rfr)/E
A simpler way is derive the sharpe ratio, and use that to solve for the standard deviation of the levered portfolio, the ratio of the new sd/old sd is your leverage.
 
MrSmart wrote:
Should be like a levered bond portfolio.
(Tangent return - D * Rfr)/E
A simpler way is derive the sharpe ratio, and use that to solve for the standard deviation of the levered portfolio, the ratio of the new sd/old sd is your leverage.
Click to expand...
You will get a different answer if you use the ratio of standard deviations vs using the previously mentioned formulas where you calculate leverage based off of expected return. The weighted standard deviations using simple arithmetic weightin will over state risk therefore you will get a different answer using arithmetic SD ratios.
Correct me if i’m wrong.
 
verse214 wrote:
MrSmart wrote:
Should be like a levered bond portfolio.
(Tangent return - D * Rfr)/E
A simpler way is derive the sharpe ratio, and use that to solve for the standard deviation of the levered portfolio, the ratio of the new sd/old sd is your leverage.
Click to expand...
You will get a different answer if you use the ratio of standard deviations vs using the previously mentioned formulas where you calculate leverage based off of expected return. The weighted standard deviations using simple arithmetic weightin will over state risk therefore you will get a different answer using arithmetic SD ratios.
Correct me if i’m wrong.
Click to expand...
I’ll get back to it when I get home, currently on phone.
 
Are you all just asking how you would solve for the e(r) when including the RFR? It’s the same as you would when choosing any other corner portfolio. There is no difference.
 
You mean w and 1-w?
I did something simillar in the exam, then divide them to get leverage.
 
Guys it’s the exact same formula for 2 corner portfolios but Rf instead the corner portfolio. That’s it.
The formula of (levered return = unlevered return + [D/E * (unlevered return - cost)] is exactly the same formula of w and 1-w !!!!!
 
Suppose P = 7.5, Rfr = 2 E(r) = 10
Then w(rfr) = -0.45 w(P) = 1.45
So 0.45/1.45 = 31% borrowed.
That’s how I’d do it.
 
MrSmart wrote:
Suppose P = 7.5, Rfr = 2 E(r) = 10
Then w(rfr) = -0.45 w(P) = 1.45
So 0.45/1.45 = 31% borrowed.
That’s how I’d do it (or did it).
Click to expand...
This hypothetical question was asking for weights though wasn’t it? so .45 and 1.45 would be right…
 
verse214 wrote:
MrSmart wrote:
Should be like a levered bond portfolio.
(Tangent return - D * Rfr)/E
A simpler way is derive the sharpe ratio, and use that to solve for the standard deviation of the levered portfolio, the ratio of the new sd/old sd is your leverage.
Click to expand...
You will get a different answer if you use the ratio of standard deviations vs using the previously mentioned formulas where you calculate leverage based off of expected return. The weighted standard deviations using simple arithmetic weightin will over state risk therefore you will get a different answer using arithmetic SD ratios.
Correct me if i’m wrong.
Click to expand...
If portfolio 7.5%, E(r) = 10% Rfr = 2%, SD(p) = 20%
Then Sharpe = 0.275
10 = 2 + 0.275x
x = 29%
29/20 = 1.45
Leverage = (1.45-1)/1.45 = 31%
 
MissCleo wrote:
MrSmart wrote:
Suppose P = 7.5, Rfr = 2 E(r) = 10
Then w(rfr) = -0.45 w(P) = 1.45
So 0.45/1.45 = 31% borrowed.
That’s how I’d do it (or did it).
Click to expand...
This hypothetical question was asking for weights though wasn’t it? so .45 and 1.45 would be right…
Click to expand...
How much do you need to borrow, or D/E.
I don’t think writing down one more step would deduct points if you got this far, hope not at least.
 
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