- CFA Exams
- CFA Level I Exam
- Topic 9. Portfolio Management
- Learning Module 62. Portfolio Risk and Return: Part I
- Subject 6. Efficient Frontier

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**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).

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**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. |