- CFA Exams
- CFA Level I Exam
- Study Session 18. Portfolio Management (1)
- Reading 53. Portfolio Risk and Return: Part II
- Subject 1. Capital Market Theory

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**CFA Practice Question**

Consider the following three statements. Which are true?

II. Any portfolio containing the risk-free asset has zero risk.

III. The risk-free asset has a correlation of 0 with any risky asset.

I. The risk-free asset has a variance of 0.

II. Any portfolio containing the risk-free asset has zero risk.

III. The risk-free asset has a correlation of 0 with any risky asset.

Correct Answer: I and III

By definition, the risk-free asset has a variance and a standard deviation of 0. Portfolios containing the risk-free asset will have risk proportionate to their exposure in risky assets. Since its return does not vary, the risk-free asset is uncorrelated with any risky asset.

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**User Contributed Comments**
4

User |
Comment |
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Taka |
Good question!! |

soarer1 |
Risk Free Asset = 0 Variance, 0 SD, 0 Cooreclation with risky asset |

mcspaddj |
Wow. That was an impressive question. |

BigJimStud |
A good way to verify this is to use the formula for portfolio variance. Once you know the variance of the risk free asset is 0, it zeroes out 2 terms of the formula leaving only the risky asset left. This risk asset will always have risk > 0 |