CFA Practice Question

CFA Practice Question

The CML
A. is the line running from the risk-free rate of return to a point on the Markowitz efficient frontier. Different investors have different CMLs running through different parts of the efficient frontier. The difference lies in their level of risk aversion.
B. is the line running from the risk-free rate of return to a point tangent to the Markowitz efficient frontier. That point of tangency is the market portfolio. It and the CML are the same for all investors.
C. is the line running from the market portfolio to a point tangent to the Markowitz efficient frontier. All investors have identical CML lines.
Explanation: According the capital market theory, all investors invest in the same two rates: the risk-free rate of return and the rate of return on the market portfolio. Investors differ in the relative amounts they invest or borrow at two rates to achieve their desired level of risk and return. The market portfolio includes all risky assets.

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