CFA Practice Question

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CFA Practice Question

The market portfolio plays an important role because it ______

A. is the highest-return efficient portfolio.
B. is the one portfolio that all investors will choose to get the highest CML.
C. is the most efficient of all portfolios.
D. dominates all portfolios on the CML.
Correct Answer: B

The other answers are untrue.

User Contributed Comments 8

User Comment
mtcfa How come A is untrue?
PedroEdmundo a portfolio is efficient or not... U can't compare efficiency!
thud A is untrue because there are several efficient portfolios along the Markowitz efficiency frontier.
HenryQ Guess the 'the highest CML' means the highest slope.
raymondg What if investors borrow with the risk free rate and invest in M. Wouldnt the expected return be even higher?
charlie1 yes you will get higher expected return PLUS higher risk: you will still be on the CML (extended line). However if you choose another portfolio (non-market) then for the same risk your expected return will be lower.
michlam14 i think we can look at the return to risk ratio here (sharpe ratio) which is the slope of the CML: (E(R)-Rf)/Sm. For pts above M on the CML, it is attainable with borrowing but the sharpe ratio will be lower because the slope is not as steep due to premium requried on borrowing
johntan1979 Nice question! You thought you knew it all, but...
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