Skip to content

IAI Actuarial Core Principles · Economic Modelling · Mean-variance portfolio theory

Under the one-fund separation result with a risk-free asset, which statement is correct for investors who all hold the same beliefs and maximise mean-variance utility?

All investors with common beliefs hold the same tangency portfolio of risky assets and differ only in how much they put in it versus the risk-free asset. Risk aversion fixes the position along the capital market line, not the composition of the risky portfolio.

  1. AAll investors hold the same mix of risky assets; they differ only in the split between that mix and the risk-free assetCorrect
  2. BAll investors hold the same total amount of the risk-free asset
  3. CMore risk-averse investors hold a different tangency portfolio from less risk-averse investors
  4. DInvestors with higher risk aversion hold a higher proportion in the market portfolio
  5. The tangency portfolio changes with each investor's utility function

Explanation

The tangency portfolio, found from the risk-free rate and the risky asset frontier, is independent of preferences. Preferences determine only the position along the capital market line. More risk-averse investors hold less in the risky portfolio, so the other options are wrong.

Did you get it right without looking?

One question tells you little. A timed set on Mean-variance portfolio theory shows your real accuracy, how long you take and where you lose marks.

Practise Mean-variance portfolio theoryFree diagnostic mock

More Mean-variance portfolio theory questions