Skip to content

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

An investor combines a risk-free asset with a risky portfolio on the capital allocation line (CAL). The investor then borrows at the risk-free rate and invests more than 100% of wealth in the risky portfolio. The resulting portfolio most likely lies:

The portfolio lies to the right of the risky portfolio on the CAL. Borrowing at the risk-free rate leverages the risky holding to more than 100% of wealth, which raises both expected return and standard deviation beyond those of the risky portfolio itself.

  1. Ato the right of the risky portfolio on the CALCorrect
  2. Bat the risk-free asset point on the CAL
  3. Cbetween the risk-free asset and the risky portfolio on the CAL

Explanation

Borrowing at the risk-free rate creates a negative weight in the risk-free asset and a weight above 1 in the risky portfolio. Expected return and standard deviation both exceed those of the risky portfolio, so the position lies beyond it on the CAL. Points between the two require lending, not borrowing.

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