CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

Which of the following statements regarding the efficient frontier are incorrect?

I. The efficient frontier represents the set of portfolios that provides the maximum rate of return for every given level of risk.
II. The efficient frontier provides the maximum risk for each level of return.
III. Points along the efficient frontier dominate all points beneath the curve.
IV. Points along the curve to the right of other points on the curve must have a higher expected return and higher level of risk.
A. I and III
B. II only
C. II and IV
Explanation: The efficient frontier provides the minimum risk for each level of return. Points along the efficient frontier dominate all points beneath the curve and must have an increasing expected rate of return as they move along the curve to the right. The expected risk level also corresponds with movement to the right.

User Contributed Comments 3

User Comment
AusPhD Hmmm, why not D? Is it just the lack of the work 'expected'
Kuki D is correct. If you look at the effecient frontier graph, any point on the curve (on the right side of the previous point) MUST have a higher return AND a higher risk to compensate. i.e the graph never slopes downward.
Jaldendu I originally though that IV could be incorect (which would make answer C correct)because: the CML line looks like it converges to some expected rate of return (i.e. slope = 0 as risk -> to infinity). In this case IV would have been incorect as a point to the right would no longer produce a higher expected rate of return; however, a portfolio would no longer be considered efficient if you assume additional risk without an increase in expected return. This means that while the slope of the CML may converge to 0 it will never equal zero. The CML must stop this point
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