CFA Practice Question

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CFA Practice Question

Which of the following statements is (are) inconsistent with the Markowitz theory of portfolio management?

I. Investors maximize a one-period expected utility curve with inherent diminishing marginal utility of wealth.
II. Investors use the measure of beta as the basis of determining risk.
III. Investors base their investment decisions exclusively on the basis of expected risk and return.
IV. a single asset or portfolio of assets is considered to be efficient if no available asset has a superior return for a given risk level or lower risk given a return level.
A. I only
B. II only
C. III and IV
Explanation: Investors use the variability of expected returns as the basis of risk. Beta is not a risk measure in the Markowitz portfolio theory. Markowitz addressed the covariance of returns from differing investments and the value of portfolio diversification. He demonstrated how it was possible to reduce portfolio risk, as measured through variability of expected returns, by investing in assets that did not move in the same direction. All of the remaining statements are true.

User Contributed Comments 6

User Comment
kalps He looked at the covariance of returns from different investments - he did not consider beta
sskr Variability of expected return (covariance) - basis of risk.
octavianus Markowitz measures risk as variance/standard deviation of expected returns.
JeffAu OMG, it's inconsistent. I read it incorrectly.
thekobe Jeffau, that is the point, sometimes you know the concept but the question can confuse you in which is being asked
Mikehuynh Tricky question really!
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