# How do you interpret a positive portfolio weight (when using CAPM and CML to calculate efficient portfolios)

I am asked to solve the following homework question: Risk free rate: 2% Expected excess return on market portfolio: 8% Standard deviation of market portfolio: 20% The efficient portfolio has the following: Expected return: 12% Standard deviation: 25%

I am asked the following question: "How can the expected return of the wining portfolio be achieved? Specify the amount invested in each asset/portfolio of assets?" and I've used the following calculation to determine portfolio weight of 1.25: 0.12=ω0.1+(1-ω)0.02⇒ω=1.25

And here is where I am a little lost. What does it mean to have the portfolio weight >1 and what does it mean? If it's incorrect, where did I go wrong before? Thanks for any help!

• It means that you short the other asset. In this case, it is the risk-free asset you short, which means you are borrowing money. However, how do you get 0.1 in your formula for the market? Nov 23, 2017 at 8:46
• Expected excess return on market portfolio: RM-Rf=0.08 so RM=0.1 Nov 23, 2017 at 8:57
• So does this mean I invest everything in the risky asset and then borrow 25% more at the risk-free rate? Nov 23, 2017 at 9:03
• Yeah, but you also invest those borrowed 25% in the market. Nov 23, 2017 at 9:13