- CFA Exams
- CFA Level I Exam
- Topic 9. Portfolio Management
- Learning Module 2. Portfolio Risk and Return: Part II
- Subject 1. Capital Market Theory
CFA Practice Question
Consider the following three statements. Which are true?
II. Any portfolio containing the risk-free asset has zero risk.
III. The risk-free asset has a correlation of 0 with any risky asset.
I. The risk-free asset has a variance of 0.
II. Any portfolio containing the risk-free asset has zero risk.
III. The risk-free asset has a correlation of 0 with any risky asset.
Correct Answer: I and III
By definition, the risk-free asset has a variance and a standard deviation of 0. Portfolios containing the risk-free asset will have risk proportionate to their exposure in risky assets. Since its return does not vary, the risk-free asset is uncorrelated with any risky asset.
User Contributed Comments 4
| User | Comment |
|---|---|
| Taka | Good question!! |
| soarer1 | Risk Free Asset = 0 Variance, 0 SD, 0 Cooreclation with risky asset |
| mcspaddj | Wow. That was an impressive question. |
| BigJimStud | A good way to verify this is to use the formula for portfolio variance. Once you know the variance of the risk free asset is 0, it zeroes out 2 terms of the formula leaving only the risky asset left. This risk asset will always have risk > 0 |