CFA Practice Question

CFA Practice Question

On the CML, as the portfolio is tilted more towards riskless asset, the expected rate of return falls and approaches the riskless rate. As their increasing weight on the riskless asset continues, there comes a point where the entire portfolio (100%) is invested in the riskless asset. Increasing the portfolio weight on the riskless asset beyond this point:
A. will be impossible.
B. will result in negative beta and an expected return less than the risk-free rate.
C. will result in negative variance and an expected return less than the risk-free rate.
Explanation: It will be negative beta, and will provide insurance against market moves. This insurance (desirable) is the trade-off for expected return lower than the risk-free rate (undesirable). Negative beta is possible (beta is a measure of correlation) but negative variance is impossible.

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