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CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part II

A portfolio on the CML has an expected return of 10% and a standard deviation of 16%. The risk-free rate is 4%. The expected return of the market portfolio is 8%. The standard deviation of the market portfolio is closest to:

The market standard deviation is about 10.7%. A portfolio on the CML has the same Sharpe ratio as the market: 6% divided by 16% equals 0.375. Setting the market premium of 4% over σ equal to 0.375 gives σ of 10.67%.

  1. A6.7%
  2. B10.7%Correct
  3. C16.0%

Explanation

The portfolio's slope is (10% − 4%)/16% = 0.375, which must equal the CML slope (8% − 4%)/σm. So σm = 4%/0.375 = 10.67%. Check: 4% + 0.375 × 10.67% = 8%.

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