CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part I
Compared with a combination of two risky assets with correlation of +0.5, the same two assets with a correlation of -0.3 will most likely produce a minimum-variance frontier that is:
The frontier becomes more bowed to the left, giving lower risk for any given expected return. Expected returns do not change, but a lower correlation cuts the covariance term in portfolio variance, so greater diversification benefits appear at each weighting.
- Aidentical in shape, because expected returns are unchanged
- Bmore bowed to the left, offering lower risk for a given returnCorrect
- Cless bowed, offering higher risk for a given return
Explanation
Lower correlation reduces portfolio variance at every weighting while expected returns stay the same. The frontier therefore bows further toward the left (lower risk). Shape depends on correlation, not only on expected returns.
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.
More Portfolio Risk and Return: Part I questions
- Two investors face the same CAL, constructed from a risk-free asset and the optimal risky portfolio. Investor X is more risk averse than Inv…
- Which statement about the minimum-variance frontier and the efficient frontier is most accurate?
- Compared with a normal distribution having the same mean and standard deviation, a return distribution with positive excess kurtosis is most…
- An investor combines a risk-free asset with a risky portfolio on the capital allocation line (CAL). The investor then borrows at the risk-fr…
- Two risky assets have a correlation of +1.0. Compared with the weighted average of the two standard deviations, the standard deviation of a …
- Which statement about covariance and correlation is most accurate?