CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part II
Under capital market theory with homogeneous expectations and a risk-free asset, the market portfolio is most likely the:
The market portfolio is the tangency portfolio where the capital market line touches the efficient frontier of risky assets. It has the highest Sharpe ratio, and all investors hold it regardless of risk aversion, which only determines how much they mix with the risk-free asset.
- Aportfolio with the lowest standard deviation on the efficient frontier
- Btangency portfolio of the capital market line with the risky-asset efficient frontierCorrect
- Cportfolio chosen only by investors with the lowest risk aversion
Explanation
With a common risk-free rate and identical expectations, every investor holds the same risky portfolio, the tangency point with the highest Sharpe ratio. Risk aversion affects only the mix with the risk-free asset, not the risky portfolio.
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