CFA Practice Question

CFA Practice Question

Which of the following is not important in the absence of superior analysts?
A. minimizing transaction costs
B. lending or borrowing risk-free assets
C. rebalancing to maintain the specified risk level
Explanation: If you do not have access to superior analysts, you should do the following:
1. determine and quantify your risk preferences
2. divide the total portfolio between lending or borrowing risk-free and risky assets
3. diversify completely and on a global basis
4, rebalance to maintain the specified risk level
5. minimize transaction costs

User Contributed Comments 7

User Comment
armanaziz I don't get it. Based on the explanation's point 2 risk-free assets are important, too.
nike I guess you cannot decide or do anything to C but you can do something with other choices. This makes B the least important factor. It's given and you have to take it.
Carol1 Since it is risk free investment you do not need to analysis the risk.
pjdeschenes I disagree with Carol: If you know your risk pref, you lend or borrow at RFR to dial in the portion of the market portfolio that you own.
sh21 I wish steve had something to say!
pstebelp They assume if you don't have superior analysts, you wouldn't be wise enough to lend/borrow at the risk free rate. If you are borrowing at the risk free rate, you are employing a sophisticated strategy... In other words, if no superior analyst, simplify and reduce risk!
merc5559 why is the answer that's "wrong" given as part of step 2 in what to do when you don't have superior analysts
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