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

An analyst compares an investor's indifference curves with the capital allocation line. The investor's optimal portfolio is best described as the point where:

The optimal portfolio is where the highest attainable indifference curve is tangent to the capital allocation line. This point gives the greatest utility the investor can reach given the available risk-return trade-offs, reflecting both the opportunity set and the investor's risk aversion.

  1. Athe highest attainable indifference curve touches the capital allocation lineCorrect
  2. Bthe capital allocation line crosses the vertical axis
  3. Cthe indifference curve with the lowest utility intersects the efficient frontier

Explanation

The optimal portfolio is where the highest achievable indifference curve is tangent to the opportunity set, here the CAL. Lower curves are attainable but give less utility. The vertical intercept is the risk-free rate, which is only one possible portfolio.

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