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

Which statement about the minimum variance portfolio of two risky assets with correlation less than 1 is correct?

The minimum variance portfolio is the lowest-risk point of the feasible set and marks the start of the efficient frontier, since efficient portfolios are those on or above it. It is not generally equally weighted and does not necessarily maximise the Sharpe ratio.

  1. AIt always has the highest Sharpe ratio on the frontier
  2. BIt is always an equal-weighted portfolio
  3. CIt has lower variance than either asset alone only if correlation is negative
  4. DIt lies at the lowest-risk point of the efficient frontier, where the frontier beginsCorrect
  5. It lies on the lower, inefficient part of the curve

Explanation

The minimum variance portfolio is the leftmost point of the feasible set. Efficient portfolios are those at or above it, so the efficient frontier starts there. It is not generally equal-weighted, and it need not maximise Sharpe ratio.

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