Hi all,
I’ve come across this situation a few times now in the Schweser and Finquiz Mocks. Basically, we are told to find the optimal asset allocation for a person with required return x and 5 corner portfolios. However, it does not specificaly address whether leverage (or risk-free asset) are allowed to be used.
So, options are to either 1) Combine Portfolios A+B to meet required return or 2) Choose just the highest Sharpe Ratio Portfolio and adjust leverage/risk-free asset accordingly to meet required return.
My question is: without specifying whether leverage is allowed or not, do people assume it is or isn’t? If it’s not we must do option 1), if it is allowed, often times option 2) becomes preferable.
Hopefully CFA makes it more clear than these mocks and it won’t be a problem.
Thanks.