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Kerry Back
Effect of short sales constraints 
- The effect of short sales constraints depends on correlations and differences in expected returns.
- If there are assets or portfolios with different expected returns and high correlations, shorting can be useful.
- E.g., if you think CVX will beat XOM, then buy CVX and short XOM.
Different saving and borrowing rates
- Two tangency portfolios, one at the saving rate and second at the borrowing rate
- Frontier/optimal portfolios are the union of
- Save \(x_s\) and invest \(1-x_s\) in the saving-rate tangency portfolio
- Hold a combination of the two tangency portfolios (without saving or borrowing)
- Borrow \(x_b\) and invest \(1+x_b\) in the borrowing-rate tangency portfolio
- This is true unless the borrowing rate is too high. Then replace 2 and 3 with “hold risky-only frontier portfolios.”
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