It appears as if whatever route you take
- Langrange Multipliers
- Maximising MPR via differentiation
the following formula can be used to get the final answer (derived by optimising the Sharpe ratio/MPR);
Xa = ( [Ea - rf]Vb- [Eb - rf] Cab)/([Eb - rf]Va+ [Ea - rf]Vb - [Eb - rf + Ea - rf]Cab)
notice similarity with
Xa= (Vb - Cab)/(Va+ Vb- 2Cab ) for minimum variance portfolio.
for question 4 of April 2009, we get
Xa = 18^2/(18^2+ 5*8^2 ) = 81/161...fast and easy!!!!!!
Tutors, will one loose marks for applying this formula, especially because the April 2009 question 4 didn't state how the efficient frontier should be solved?
You may view attached PDF if the algebraic spaghetti above is confusing.
Last edited by a moderator: Mar 9, 2015