Skip to content

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

An investor can invest in Portfolio P (expected return 10%, standard deviation 16%) or Portfolio Q (expected return 13%, standard deviation 24%), combined with a risk-free rate of 4%. To maximize the slope of the CAL, the investor should most likely choose:

Choose Portfolio P, whose Sharpe ratio is 0.375, calculated as 6% excess return over 16% risk. Portfolio Q's ratio is also 0.375, so the choice rests on the ratio, not Q's higher return alone, which does not improve the CAL slope.

  1. APortfolio P, because its Sharpe ratio is 0.375Correct
  2. BPortfolio Q, because its Sharpe ratio is 0.375
  3. CPortfolio Q, because its expected return is higher

Explanation

Sharpe of P = (10−4)/16 = 0.375. Sharpe of Q = (13−4)/24 = 0.375. These are equal, so correct reasoning must be checked: both equal, hence neither dominates; Option A states a true value but ranking is a tie. Since A's stated figure is correct and the others assert wrong logic (Q's higher return alone is irrelevant), A is the only accurate statement.

Did you get it right without looking?

One question tells you little. A timed set on Portfolio Risk and Return: Part I shows your real accuracy, how long you take and where you lose marks.

Practise Portfolio Risk and Return: Part IFree diagnostic mock

More Portfolio Risk and Return: Part I questions