CFA Practice Question
What would not be characteristic of a market portfolio?
A. The market portfolio would correlate perfectly with a completely diversified portfolio.
B. The standard deviation of returns would change over time.
C. The market portfolio has a certain amount of unsystematic risk.
Explanation: A market portfolio includes all risky assets such as non-U.S. Securities, real estate, coins, stamps, etc. It would be on the Capital Market Line. Since the portfolio contains all risky assets, the risk unique to individual assets, called unsystematic risk is diversified away. Specifically, the unique risk of any asset is offset by the unique variability of the other assets in the portfolio.
User Contributed Comments 2
| User | Comment |
|---|---|
| chantal | Can someone explain why the standard deviation of return change over time ? First, no unsystematic risk only systematic risk. Does this mean that the overall portfolio will shift as it becomes affected by economic and other external factors ? |
| marattus | It is asking for what is NOT a characteristic of SML |