corner portfolio

[zxfmontreal]

Schweser practice exam volume 1 exam 2 morning seeesion question 6 c, why corner portfolio 4 is selected? I know this portfolio has the highest sharp ratio, but the question didn’t specifically ask for a portfolio that approximates the market portfoio?

 

[Glue85]

Could you copy the question so we can see better? I am assuming the question is including buy and lend at risk free rate. If there is this opetion then remember the CML is the line between the risk free rate and market portfolio where the market portfolio has the highest sharp ratio. so your allocation must be a combination between market portfolio and risk free assets. Hope this help.

 

[pokhim]

Yep, from memory the question allows shorting, therefore you would choose the CML which is Rf and a portfolio of risk assets.
If there is no shorting allowed then you should choose the 2 portfolios corner with returns closest to the required return.