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

Which of the following statements about the minimum-variance frontier and the efficient frontier is most accurate?

The efficient frontier is the part of the minimum-variance frontier that lies above the global minimum-variance portfolio. Portfolios below that point are dominated, since another portfolio offers a higher expected return for the same risk, so they are not efficient.

  1. AThe efficient frontier is the portion of the minimum-variance frontier above the global minimum-variance portfolio.Correct
  2. BThe efficient frontier includes every portfolio on the minimum-variance frontier, including those with lower returns than the global minimum-variance portfolio.
  3. CThe efficient frontier lies below the minimum-variance frontier because it adds a constraint on expected return.

Explanation

Portfolios on the minimum-variance frontier below the global minimum-variance portfolio are dominated by portfolios with the same risk but higher return. Only the upper segment is efficient. The other statements misstate this relationship.

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