Margin Requirements and Portfolio Optimization: A Geometric Approach

Journal of Asset Management, 15(3), June 2014, pp.191-204

26 Pages Posted: 15 Feb 2015

See all articles by Sheng Guo

Sheng Guo

Florida International University

Date Written: April 10, 2014

Abstract

Using geometric illustrations, we investigate what implications of portfolio optimization in equilibrium can be generated by the simple mean-variance framework, under margin borrowing restrictions. First, we investigate the case of uniform marginability on all risky assets. It is shown that changing from unlimited borrowing to margin borrowing shifts the market portfolio to a riskier combination, accompanied by a higher risk premium and a lower price of risk. With the linear risk-return preference, more stringent margin requirements lead to a riskier market portfolio, contrary to the conventional belief. Second, we investigate the effects of differential marginability on portfolio optimization by allowing only one of the risky assets to be pledged as collateral. It is shown that the resulting optimal portfolio is not always tilted towards holding more of the marginable asset, when the margin requirement is loosened.

Keywords: portfolio optimization, margin, collateral, borrowing constraint, mean-variance, efficient frontier, asset allocation

JEL Classification: G11

Suggested Citation

Guo, Sheng, Margin Requirements and Portfolio Optimization: A Geometric Approach (April 10, 2014). Journal of Asset Management, 15(3), June 2014, pp.191-204, Available at SSRN: https://ssrn.com/abstract=2564677

Sheng Guo (Contact Author)

Florida International University ( email )

FIU Economics, DM 318A
11200 SW 8th Street
Miami, FL 33199
United States

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