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

Two investors both hold portfolios on the same capital allocation line tangent to the efficient frontier. Investor X is more risk averse than Investor Y. Compared with Investor Y, Investor X's optimal portfolio most likely has a:

Investor X most likely holds a larger weight in the risk-free asset while holding the same risky portfolio as Investor Y. The tangency portfolio is identical for all investors, so risk aversion affects only the split between the risk-free asset and that portfolio.

  1. Alarger weight in the risk-free asset and the same risky portfolio compositionCorrect
  2. Bsmaller weight in the risk-free asset and a different risky portfolio composition
  3. Clarger weight in the risk-free asset and a lower-Sharpe-ratio risky portfolio

Explanation

Under the separation theorem, the risky portfolio is the same for all investors. A more risk-averse investor places more in the risk-free asset. Both portfolios lie on the same line, so the Sharpe ratio is identical.

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