CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

Which of the following is (are) true?

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.

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!
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