- CFA Exams
- CFA Level I Exam
- Study Session 18. Portfolio Management (1)
- Reading 53. Portfolio Risk and Return: Part II
- Subject 4. Applications of the CAPM

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**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.

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**User Contributed Comments**
2

User |
Comment |
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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. |