Corner Portfolios

[brisby55]

Are there an unlimited amount of Corner Portfolios on the efficient frontier? I think I’m a little confused as to how you come up with corner portfolios. An example in the book says that “seven corner portfolios provide the information needed to trace the efficient frontier.” But once you have the efficient frontier, couldn’t every spot of the frontier constitute a Corner Portfolio? Thanks

 

[Alladin]

Every spot on the efficient frontier is a minimum variance portfolio (MVP) but not every MVP is a corner portfolio. Not all efficient portfolios contain all assets.A corner portfolio occurs every time a new security enters an efficient portfolio or an old security leaves it.Moving along the risky efficient frontier, securities are added and deleted.
Let’s start at the right end of the efficient frontier. Here we have a MVP with the highest expected return and risk, an efficient portfolio that is 100 % invested in the most risky asset (which also has the highest return).In order to obtain portfolios with lower risk and lower expected return, another asset must be added. To get an even lower combination of risk and return we add yet another security to the mix until we reach the Global minium variance portfolio ( the other end of the frontier)
There are infinte efficient portfolios on the efficeint frontier because conceptually you can tweak the weights of securities/assets in a portfolio by an infinitely small amount. The point of corner portfolios is that you can use a limited number of CPs to identify unlimited MVPs.
Hope this is right…don’t remember much of L3 anymore..never really did lol

 

[cpk123]

This defines the corner Portfolio methodology.

Quote:
Adjacent corner portfolios define a segment of the minimum-variance frontier within which 1) portfolios hold identical assets and 2) the rate of change of asset weights in moving from one portfolio to another is constant. As the minimum-variance frontier passes through a corner portfolio, an asset weight either changes from zero to positive or from positive to zero.
(Institute 234)
Institute, CFA. Level III 2013 Volume 3 Capital Market Expectations, Market Valuation, and Asset Allocation. John Wiley & Sons (P&T), 6/18/2012. <vbk:9781937537357#page(234)>.

 

[yashjhaveri1]

Alladin wrote:
Every spot on the efficient frontier is a minimum variance portfolio (MVP) but not every MVP is a corner portfolio. Not all efficient portfolios contain all assets.A corner portfolio occurs every time a new security enters an efficient portfolio or an old security leaves it.Moving along the risky efficient frontier, securities are added and deleted.
Let’s start at the right end of the efficient frontier. Here we have a MVP with the highest expected return and risk, an efficient portfolio that is 100 % invested in the most risky asset (which also has the highest return).In order to obtain portfolios with lower risk and lower expected return, another asset must be added. To get an even lower combination of risk and return we add yet another security to the mix until we reach the Global minium variance portfolio ( the other end of the frontier)
There are infinte efficient portfolios on the efficeint frontier because conceptually you can tweak the weights of securities/assets in a portfolio by an infinitely small amount. The point of corner portfolios is that you can use a limited number of CPs to identify unlimited MVPs.
Hope this is right…don’t remember much of L3 anymore..never really did lol

 

[yashjhaveri1]

THE BEST EXPLANATION OF ANY CFA FORUM TOPIC SO FAR…!!
AMAZING….REALLY HELPED ME A LOT
THANKS!!

 

[iamthenight]

gd one