Efficient Portfolios with Leverage: Changing Risk Allocations for Better Returns
The paper revisits Modern Portfolio Theory and shows that with different levels of borrowing, an Efficient Portfolio is a mix of two portfolios on different efficient frontiers. This means that changing how much risk and return an investor wants won't affect the overall allocation between the safest and riskiest assets, but will change how much risk is taken within the riskier assets. Diversification in an Efficient Portfolio is more about making tactical decisions rather than long-term strategies.