CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part II
Under the assumptions of the capital market line (CML), which of the following portfolios is most likely the tangency portfolio that all investors combine with the risk-free asset?
The tangency portfolio is the market portfolio of all risky assets held in proportion to market value. With homogeneous expectations, all investors hold the same risky portfolio and differ only in how much they lend or borrow at the risk-free rate.
- AThe minimum-variance portfolio of risky assets
- BThe market portfolio of all risky assetsCorrect
- CThe portfolio with the highest expected return
Explanation
With homogeneous expectations, every investor holds the same optimal risky portfolio, which is the portfolio of all risky assets weighted by market value, i.e., the market portfolio. The minimum-variance portfolio ignores return, and the highest-return portfolio ignores risk.
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