- CFA Exams
- CFA Level I Exam
- Topic 9. Portfolio Management
- Learning Module 62. Portfolio Risk and Return: Part I
- Subject 6. Efficient Frontier
CFA Practice Question
A and B are efficient portfolios. Therefore, ______
A. a combination of investments in A and B is necessarily an efficient investment.
B. if A has a higher expected return, it must have a lower risk.
C. A and B have the same risk-to-reward ratio OR A and B must have the same risk.
Explanation: An efficient frontier is made up of portfolios with the highest expected return for a given level of risk and the lowest level of risk for a given level of expected returns. Hence, if A has a higher expected return, it must have a higher risk. However, this does not mean that A cannot have a higher risk-to-reward ratio. Finally, a combination of two efficient portfolios is always efficient (because this is a property of the frontier).
User Contributed Comments 9
| User | Comment |
|---|---|
| Klingelbruch | That only holds if borrowing and lending rate do not differ. |
| snider | yes that should be assumed in an efficient market. |
| CocaColas | A combination of efficient portfolios would be efficient too. |
| sbajaj | same risk-reward ratio is meaningless - any investor would then be willing to take higher risk if return increases proportionally |
| za20884 | can anyone explain...i am not getting it...why the ratio differ.. |
| micheleus | Why not C? |
| TonyShen | Not C: Efficient Frontier is not a straight line.... so not every point has the same ratio... |
| shival | According to CAPM Efiicient Frontier is a straight line. But in any case risk to reward ratio not the same. For exampe, get the point where all 100% in risk free asset. Risk to reward ratio will be zero, definitely for the next it will above zero. |
| reganbaha | The efficient frontier is a curved line. The capital market line is a straight line. The CML involves different weights of a risk-free asset in combination with the market portfolio. |