CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part I
Two investors face the same CAL, constructed from a risk-free asset and the optimal risky portfolio. Investor X is more risk averse than Investor Y. Which statement is most accurate?
Both investors hold the same optimal risky portfolio, but the more risk-averse investor puts more in the risk-free asset. Risk aversion affects only the position along the shared CAL, not the composition of the risky portfolio or the slope.
- ABoth hold the same risky portfolio, but X allocates more to the risk-free asset.Correct
- BX holds a risky portfolio with a lower Sharpe ratio than Y.
- CX selects a different CAL with a flatter slope than Y.
Explanation
With homogeneous expectations, all investors hold the same optimal risky portfolio, and risk aversion determines only the split between it and the risk-free asset. The more risk-averse investor holds more risk-free. The CAL slope (Sharpe ratio) is the same for both.
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