Flashcard Set Preview
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| 1 |
The Capital Allocation Line (CAL) is
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the straight line drawn from the
risk-free rate to a tangency portfolio on the efficient frontier,...
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| 2 |
If the investor’s required rate of return is lower than the expected return on the tangency...
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invest a portion of the funds in a risk-free asset and the remainder in the tangency portfolio.
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| 3 |
If, on the other hand, the investor’s required rate of
return is higher than the tangency...
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use margin (borrow at the risk-free rate) to leverage the return.
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| 4 |
If the IPS
specifically prohibits borrowing, then we
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select different corner portfolios
above the tangency portfolio.
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The new corner portfolios will be the ones with
the highest
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Sharpe ratios that bracket the expected rate of return of the
investor’s required rate...
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