CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

Which portfolio is off the Markowitz efficient frontier based on the dominance principle?
A. Portfolio A, with an expected return of 8% and a standard deviation of 10%.
B. Portfolio B, with an expected return of 15% and a standard deviation of 21%.
C. Portfolio C, with an expected return of 16% and a standard deviation of 20%.
Explanation: A is at the extreme ends of the efficient frontier and is a variable choice. C is clearly superior to B because it has both a higher expected return and a lower risk. Thus, B cannot be on the efficient frontier.

User Contributed Comments 2

User Comment
endurance hint: calculate E(r)/std.dev for all three portfolios - B is way off
johntan1979 That doesn't work all the time.

Best way is to picture the EF graph. Investors must be compensated (higher returns) for taking on higher risks, not the other way round. B violates this principle.
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