- CFA Exams
- CFA Level I Exam
- Study Session 18. Portfolio Management (1)
- Reading 53. Portfolio Risk and Return: Part II
- Subject 1. Capital Market Theory

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**CFA Practice Question**

In the presence of a risk-free security, the efficient frontier ______

A. consisting of risky assets moves down parallel to itself.

B. consisting of risky assets moves up parallel to itself.

C. changes and is replaced by a straight line.

**Explanation:**In the presence of a risky asset, the efficient frontier of risky assets is dominated by a new efficient frontier consisting of the risk-free security and the tangent portfolio, found by joining the risk-free security with a point on the efficient frontier of risky securities where the line has the highest slope.

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**User Contributed Comments**
3

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

danlan |
This is the Capital Market Line |

broadex |
Dont understand the slope of this new line. If all securities are risk free surely all the returns are at the same level and there wont be any line??? Can some genie explain this to me. |

Jdadd21 |
adding a risk free rate increases the slope of the line, which is more favorable to investors as it implies a higher expected return (y axis) for the same, or less, standard deviation (x axis). |