CFA Practice Question

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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).

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.
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