CFA Practice Question
Which of the following methods can be used to attain a higher risk-return combination than the market portfolio allows?
A. Add leverage and invest in the efficient risk-asset portfolio.
B. Choose an asset below the CML.
C. Choose an asset above the CML.
Explanation: It is possible to attain a higher risk-return combination than the market portfolio allows by adding leverage and investing in the efficient risk-asset portfolio. This increases both risk and return.
User Contributed Comments 7
| User | Comment |
|---|---|
| ylepape | higher risk AND higher return ; combination unchanged ; I do not think the risk-return combination is better with more funds invested |
| johnsk | Yes the combination is changed as you are borrowing money and leveraging the risk/return. |
| rockeR | Hey guys, in my opinion, it is not high risk, high return. It is HIGH RISK, HIGH LOSS. |
| danlan | Higher risk-return means higher risk and higher return, not higher return for same risk. |
| egghead | fully agree. the dot would be still on the same CML that goes beyond market portfolio. Therefore risk / return trade-off is essentially the same |
| alles | If it was possible to attain a higher risk-return combination (more return for 1 unit of risk) by leveraging the market portfolio, then everyone would be better off by leveraging as much as possible. |
| harrybay | Is this an English exam? Because this is playing with words. |