- CFA Exams
- CFA Level I Exam
- Study Session 18. Portfolio Management (1)
- Reading 52. Portfolio Risk and Return: Part I
- Subject 6. Efficient Frontier

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**CFA Practice Question**

Which of the following is (are) true?

II. Efficient portfolios minimize variance for a given level of expected returns.

III. A zero-beta portfolio is always efficient.

IV. A stock with a zero correlation coefficient with a portfolio is not useful for further diversification.

I. A portfolio that lies above the efficient frontier is undervalued.

II. Efficient portfolios minimize variance for a given level of expected returns.

III. A zero-beta portfolio is always efficient.

IV. A stock with a zero correlation coefficient with a portfolio is not useful for further diversification.

A. II and III

B. II only

C. I and IV

**Explanation:**Note that I is not possible. By definition, the efficient frontier minimizes variance for a given level of expected returns. III is not necessarily true and IV is patently wrong! A zero correlation is quite desirable. Indeed, the lower the correlation, the better its diversification capabilities.

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**User Contributed Comments**
9

User |
Comment |
---|---|

humphrey |
zero beta is risk free asset, why is it not efficient? |

mm04 |
I chose II and III and thought risk free asset is efficient. Who can elaborate on this? |

tony1973 |
What is an efficient portfolio? A portfolio that provides the greatest expected return for a given level of risk (i.e. standard deviation), or equivalently, the lowest risk for a given expected return. Therefore a risk-free asset is not necessarily efficient for an investor. |

srinirao |
risk free asset has to be efficient- it lies on the CML!. Also I though Zero-beta portfolios lie on the efficient frontier..Am I wrong |

snider |
yes you are wrong as market portfolios lie on the frontier and their beta is 1, not 0. |

kuan |
i get it... the word ALWAYS |

fedor5 |
zero beta portfolio can earn less than risk free rate that means - not always efficient. |

sheenalim |
a zero beta portfolio is not necessarily a risk free asset. please read on 'zero-beta model' pg 272. a zero beta portfolio doesn't have any systematic risk but MAY have some unsystematic risk. zero-beta portfolios will have different variances so only the one with minimum variances is efficient. |

prajacti |
thanks sheenalim! |