CFA Practice Question

CFA Practice Question

In the absence of a risk-free asset, the optimal portfolio is
A. the same for all investors. It is the point at which the security market line (SML) is tangent to the Markowitz efficient frontier. According to Markowitz portfolio theory, all investors will hold the optimal portfolio.
B. varies among for different investors. It is the point at which the Markowitz efficient frontier is tangent with a utility curve of an investor. Because different investors have different utility curves, they also have different optimal portfolios.
C. the same for all investors. It is the point at which the capital market line (CML) is tangent to the Markowitz efficient frontier. Because the CML and the efficient frontier are the same for all investors, the optimal portfolio is also the same for all investors.
Explanation: The optimal portfolio is the point on the efficient frontier that maximizes an investor's utility. According to the Markowitz portfolio theory, different investors will have different optimal portfolios because they have different risk preferences. A conservative investor will have his optimal portfolio that has less risk and less return than the optimal portfolio of a less risk-averse investor.

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