CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

The dominant line is the one that is tangent to the efficient frontier. All investors should target points along this line depending on their risk preferences. This line is referred to as the ______.

A. security market line
B. efficient frontier
C. capital market line
Correct Answer: C

User Contributed Comments 7

User Comment
Aimy why not A?
tony1973 Because it is not. read the last part of the notes for this LOS about the comparison.
danlan SML is not related to efficient frontier, CML is.
0is4eva The SML illustrates the risk-return relationship with the systematic covariance variable Cov(i,M) as the risk measure. Specifically, Cov(i,i) = s(i)^2 (standard deviation) so the variance of the Market portfolio is marked s(M)^2 on the x-axis. The CML illustrates the risk-return relationship with the standard deviation of the portfolio(s) on the x-axis and is plotted in the same diagram as the efficient frontier, the line is drawn through the tangent of the market portfolio M, whose standard deviation s(M) is plotted on the x-axis.
SML - covariance of all portfolios with M.
CML - standard deviation of all portfolios, also M.
Both have E(R) on the y-axis.
danlan2 SML has beta on the x-axis, CML has sigma on the x-axis.
charomano CAL is the best allocation for each investor alone. The CML is what all investors agree it is best return, variance, and correlations. That's a CML is targeted by all investors depending on their risk preferences, or the weighting they prefer.
philjoe it explicitly says in the notes that the CML also becomes the new efficient frontier since it dominates...
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