CFA Practice Question

CFA Practice Question

International stock diversification yields a substantially better risk-return trade-off than does holding purely domestic stock. Which of the following is not a conclusion concerning international stock and bond diversification?
A. A substantial improvement in the risk-return trade-off can be realized by investing in internationally diversified stock and bond portfolios whose weights do not conform to relative market capitalizations.
B. The performance gap between optimal international asset allocations and passive investing in simple index funds can be quite large.
C. The market indices that measure world stock and bond portfolios lie on the efficient frontier.
Explanation: Because substantial improvement in the risk-return trade-off can be realized by investing in internationally diversified stock and bond portfolios whose weights do not conform to relative market capitalizations, the various market indices used to measure world stock and bond portfolios do not lie on the efficient frontier.

User Contributed Comments 5

User Comment
xqcc You can generate efficient frontier for internationally diversified stock as well. I believe this question is asking if world market indices lie on the efficent frontier that is generated only by domestic market portifolio.
Carol1 international investment should have negative or less correlation with domestic portfolio, causing the diversification. thus the new created international portofolio should not overlapping or lie on the efficient frontier (domestic)
jayjunk Xqcc is right. The question should specify what precisely the efficient frontier is?
StanleyMo efficient frontier say the portfolio is on the highest return with lowest risk, i guess we can reduce the risk, but we wont have the highest return.
adamrej like in the presence of foreign stocks & bond S&P does not lie on the efficient frontier because one can diversify away the unsystematic risk even more
You need to log in first to add your comment.