CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

Consider the following three statements. Which are true?

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.

User Contributed Comments 4

User Comment
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
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