Yet another Treynor Black Model question

No problem @vincentt!

Thanks @Gary, and welcome to the forum! 🙂 Are you taking Level 1 June then?

@sophie is right, the portfolio would still remain the same balance of 40/60 but the larger value of investment would mean the 7.6% return on the 150% of the initial value would be closer to 10% of the original value of the investment.

C? I assume short positions are possible?

Sorry @vincentt, I couldn’t resist this… :))

@vincentt – I’d think leverage here means borrowing money to fund the optimal portfolio, which would amplify it’s returns.

Compare a case where an investor borrowed 50% of the money to fund an initial $100 optimal portfolio. And say the optimal portfolio appreciated by 10%.

Unleveraged return = ($110-$100) / $100 x 100 = 10%
Leveraged return = ($110-$100) / $50 x 100= 20%

His leveraged return doubled when he borrowed 50%. Of course the opposite is true if the price fell. Note that this simple example has not adjusted for the cost of borrowing that money, which would slightly reduce the leveraged return %.

Hmm… I would have thought the optimum portfolio remains the same. You are not changing the composition % of it by borrowing the money. you are just amplifying potential return (upsides and downsides) of it by borrowing money.

Thanks @Sophie I am sitting the Level 1 in December thought i’d start early. Some of it is familiar but i don’t want to get too complacent .

Ps Love that Animated Gif i may have to borrow for work