- CFA Exams
- General Forum
- Topic: Q on portfolio management
|Author||Topic: Q on portfolio management|
|An analyst stated that:
1) A portfolio on CML have no unsystematic risk
2) A portfolio on efficient frontier nave no unsystematic risk
Which statements are correct and why?
A. Only 1.
B. Only 2.
C. 1 and 2.
D. Both statements are incorrect.
|I would say A is the correct answer - am I right?|
|I'd say both options have no unsystematic risk. Reading 78 of the CFA curriculum states: "The efficient frontier represents that set of portfolios that has the maximum rate of return for every given level of risk, or the minimum risk for every level of return." All unsystematic risk must have been diversified to obtain the lowest level of risk (given a certain level of return). Otherwise you could diversify some more and obtain an even lower level of risk, given your level of return. The CML consists of a combination of a risk-free asset and the market portfolio, which lies on the efficient frontier, thus that portfolio also lacks unsystematic risk. Right?|
|I will say A.|
|I would say D|
|IF both CML and efficient frontier do not have UNSYSTEMATIC risk..both graphs will be just a horizontal line-systematic risk|