Skip to content

IAI Actuarial Core Principles · Economic Modelling · Mean-variance portfolio theory

In mean-variance theory, which statement about the efficient frontier of risky assets is correct?

The efficient frontier consists of portfolios that give the highest expected return for each level of standard deviation, equivalently the lowest risk for each return. It is the upper section of the minimum-variance frontier from the global minimum-variance portfolio upward, and is independent of individual investors' preferences.

  1. AIt includes the global minimum-variance portfolio and all portfolios below it
  2. BIt consists of portfolios offering the highest expected return for each level of standard deviationCorrect
  3. CIt is always a straight line when more than two assets exist
  4. DIt depends on the investor's utility function
  5. It lies entirely below the minimum-variance frontier

Explanation

The efficient frontier is the upper part of the minimum-variance frontier, starting at the global minimum-variance portfolio. It is determined by expected returns, variances and covariances alone; the investor's utility only selects the point on it.

Did you get it right without looking?

One question tells you little. A timed set on Mean-variance portfolio theory shows your real accuracy, how long you take and where you lose marks.

Practise Mean-variance portfolio theoryFree diagnostic mock

More Mean-variance portfolio theory questions