“Darzi advises the board to allow the use of leverage. She proposes a strategic asset allocation that combines the corner portfolio closest to the tangency portfolio in Exhibit 1 with borrowing at the risk-free rate. The endowment’s annual nominal return objective remains 8.0%.”
It’s asking to calculate the optimal level of leverage to achieve the return objective.
The portfolio closest to the tangency port has a return of 7.65%, rf = .5%. I set it up as this, 7.65(w) - .5(1-w) = 8
Can someone explain to me why this is incorrect? The answer: 8 = 7.65(w) + .5(1-w)