The return opportunities associated with credits.
Because of the different approaches towards risk measurement the composition of the efficient portfolios should differ significantly. Asset classes with more negatively skewed or leptokurtic return distributions are expected to receive lower weightings in the shortfall risk and the Corning–Fisher framework. We will focus on the composition and risk/return profile of
three portfolios with very special characteristics. The minimum risk portfolio (MRP) minimizes the risk subject to the imposed short sales constraint. Furthermore, the tangency portfolio (TP) and an equal risk portfolio (ERP) are examined. The TP maximizes the ratio of excess return over the risk-free rate to portfolio risk, known as the Sharpe ratio. On a depiction of the efficient frontier the TP is determined by a tangency to the efficient frontier through the risk-free rate rf. As suggested by its name the ERP is designed to maximize return for a given level of risk, for example the volatility of a pure government portfolio. From the perspective of a government bond investor, it highlights the opportunity costs of neglecting the return opportunities associated with credits.
Comments are currently closed.