- CFA Exams
- CFA Exam: Level I 2021
- 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**

The market portfolio plays an important role because it ______

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.

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.

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**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... |