- CFA Exams
- CFA Level I Exam
- Topic 9. Portfolio Management
- Learning Module 38. Analysis of Active Portfolio Management
- Subject 2. Comparing Risk and Return
CFA Practice Question
The risk-free rate is 1.8%. You have a choice of investing in two funds:
B. hold some cash and invest the rest in Fund B.
C. invest in both Fund A and Fund B.
You want to accept a maximum volatility of 17.4% only. You best option is to ______
A. invest in Fund A only.
B. hold some cash and invest the rest in Fund B.
C. invest in both Fund A and Fund B.
Correct Answer: B
The Sharpe ratio of Fund B is higher, so you want to invest in Fund B only. This is known as two-fund separation: an investor'??s portfolio should consist of two funds,?? one of which is the risk-free asset, and the other the risky asset portfolio with the highest Sharpe ratio.
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