In this diagram, why is P the optimal risky portfolio? Y is acheivable and provides a higher return. Why isn’t Y the optimal risky portfolio?
my two pennies: Y does not lie on the Markowitz efficient frontier. so it isn’t achievable without leverage on the risk-free rate.
Y would be the lowest-risk portfolio for an investor with a target return of Y.
Without leverage he would only be able to achieve X.
Yes, portfolio Y is only achievable borrowing at the risk-free rate, so you invest more than 100% of your capital in the risky portfolio.
What also means that is Y more risky than portfolio P.
True, but irrelevant.
P is riskier than A.
I don;t think its irrelevant, Y is more risky than P but has a higher return (same risk/return ignoring financing costs as any other point on the line).
The fact that Y has higher risk & return than P is, _ by itself _, irrelevant. P has higher risk & return than A; if higher risk & return made a portfolio suboptimal, P also wouldn’t be the optimal portfolio.
P is a (100%) risky portfolio. Y is part risky portfolio, part risk-free portfolio, not a (pure, 100%) risky portfolio. That’s the point.
learnin’ all the time!
OK, noted. Tangency of Markowitz’ s frontier through P is also irrelevant or not?
there is no better combination of all risky assets than P. There is only one optimal risky portfolio, P.
by combining with risk-free asset you get the tangency line to adjust to an investor’s risk aversion
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Yes, so far I’ve been teached such but there is a bit confusion in understanding S2000’s explanations to me, NHF.
Nope: it’s relevant, because it creates the CML. It’s the (purely) risky portfolio with the highest Sharpe ratio.
I’m sorry to hear that: I want all of my explanations to be crystal clear, no confusion at all.
I am confused by the statement I have highlighted. I thought Y was a leveraged portfolio meaning it is basically P with even more risky assests added by borrowing at the risk free rate.
It is. Nobody’s suggesting that it isn’t riskier than P.
But it includes shorting the risk-free asset; that portion of the portfolio isn’t risky.
^ok, I get what you are saying
Cool!