CFA Level I · CFA Level I Exam · Basics of Portfolio Planning and Construction
In the portfolio approach to investing, an investor is most likely to evaluate a new security by considering:
Under the portfolio approach, a new security is evaluated by its contribution to the overall portfolio's risk and return, because correlations with existing holdings determine whether it improves diversification. Assessing it in isolation misses these interaction effects.
- Aits contribution to the overall portfolio's risk and returnCorrect
- Bits standalone expected return relative to its own volatility
- Cits past price performance relative to other securities held
Explanation
The portfolio approach judges each holding by how it changes the risk and return of the whole portfolio, including its correlation with existing holdings. Judging a security in isolation by its own return-to-risk ratio ignores diversification effects. Past price performance is not the basis of the approach.
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