Corner Portfolios

CFA Level III Portfolio Management
#1

Can someone help me out with a quick run through of Corner Portfolios? I keep coming across this term in the text, but haven’t found and good, concise description of what they are.

Thanks for the help :slight_smile:

#2

Have you seen the efficient frontier? The curve shaped graph? That line represents an infinite number of portfolios.

Corner portfolios are specific points on that line. So imagine 10 portfolios on different points on that curve, all of them efficient.

When you are looking for a specific return and you can’t find exact match in that list of 10 what do you do? You combine two available portfolios such that you arrive at your target return using linear interpolation.

Corner refers to the fact that these two portfolios are adjacent to each other.

#3

just adding to that, it’s basically a faster quicker way to plot it instead of running a 1000 different outputs. very very slightly less accurate but it’s pretty darn close for only using X number of corners to replicate the EF

#4

Note that corner portfolios aren’t just any old handful of portfolios along the efficient frontier. They are, specifically, portfolios at points along the efficient frontier at which the weight of one of the securities in the portfolio changes from positive to zero, or zero to positive as you move up and to the right along the efficient frontier.

The lone exception to this characterization is the global minimum variance portfolio, which is included whether or not any weight changes from zero to positive or vice-versa.

#5

Is that another way of saying no short selling?

#6

I believe you can use corner portfolio theorem for an unconstrained portfolio as well. I’ll need to double check on that.

#7

Yes.

#8

You cannot.

#9

Thank you

#10

My pleasure.

(Sometimes the only value I add is preventing someone from wasting time.)

#11

Thanks guys! Much appreciated!

#12

You’re quite welcome.

#13

Yu should try and team up with Marc at Levelup and get paid for your services :wink:

#14

He does to a degree. He has a blog with very useful information for all three exam levels that he added pay access to last year. https://financialexamhelp123.com

I used it for Level 2 last year and it was very helpful for certain areas. Bill is insanely knowledgeable and is especially strong in difficult areas such as fixed income, options and derivatives.

#15

You guys are making me blush.