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

Which statement 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 it are dominated, since another portfolio offers a higher expected return for the same risk, so rational investors would not choose them.

  1. AThe efficient frontier is the portion of the minimum-variance frontier above the global minimum-variance portfolioCorrect
  2. BThe efficient frontier includes every portfolio on the minimum-variance frontier
  3. CThe efficient frontier is the portion of the minimum-variance frontier below the global minimum-variance portfolio

Explanation

Portfolios below the global minimum-variance portfolio offer lower return than some portfolio with the same risk, so they are dominated. The efficient frontier is only the upper portion starting at the global minimum-variance portfolio.

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