CFA_L1_Assignment_142_Lesson 3: Efficient Frontier and Investor's Optimal Portfolio

CALB is...

(combinations of the risk-free asset and Portfolio B with varying weights)

This dominant portion of the MVF (the one above and to the right of the global minimum-variance portfolio) is known as the ____________ frontier.

1. Markowitz efficient frontier

The ______________ theorem states that regardless of risk and return preferences, all investors hold some combination of the risk-free asset and an optimal portfolio of risky assets.

1. two-fund separation theorem

herefore, the minimum-variance frontier that includes international assets _________ lies to the LEFT of MVFDA.

1. (MVF_IA)

considering the two-fund separation theorem, Therefore, the investment problem can be broken down into two steps:

1. The investing decision, where an investor identifies her optimal risky portfolio. 2. The financing decision, where she determines where exactly on the optimal CAL, she wants her portfolio to lie. Her risk preferences (as delineated by her indifference curves) determine whether her desired portfolio requires borrowing or lending at the risk-free rate.

The additional return attained as investors take on more risk (by successively moving to the right along the Markowitz efficient frontier to portfolios with more and more risk) __________.

1. declines

all portfolios on the MVF that lie __________ and to the ________ of the global minimum-variance portfolio dominate all portfolios on the MVF that lie ________ and to the _______ of the global minimum-variance portfolio.

1. lie above and to the right 2. below and to the right

As international assets are added to the portfolio, portfolio risk for each level of return can be reduced further given that international assets are _________________ with domestic assets.

1. not perfectly positively correlated

The line with the steepest slope is the one that is drawn from the risk-free asset to Portfolio M (which occurs at the point of ____________ between the efficient frontier and a straight line drawn from the risk-free rate)

1. tangency

An investor maximizes her utility when her indifference curve is ___________ to the CAL.

1. tangent

The _____________ contains all the possible portfolios that rational, risk-averse investors will consider investing in.

1. the markowitz efficient frontier

T/F At Point M she has all of her funds invested in Portfolio M (which is entirely composed of risky securities).

T

the global minimum variance portfolio is not the same as the minimum variance frontier T/F

T -- we compare stuff on the MVF to the global one to see what combinations on the MVF curve lie above the global dotted line

If an indifference curve intersects the investor's capital allocation line at two different points it is most likely that: The investor is not maximizing her total utility. The higher of the two points offers a higher level of utility. The portfolios are leveraged portfolios.

a. The investor is not maximizing her total utility.

an efficient frontier's slope ____________ as we move to the right

decreases

If the indifference curve intersects the CAL at two different points, an investor can optimize her utility by ...

moving to an indifference curve that lies further north‐west.

the point of tangency is between the efficient frontier and the ...

CAL

CALA is

CALA (combinations of the risk-free asset and Portfolio A with varying weights)

T/F All points on a given indifference curve do NOT offer the same level of utility.

F apparently they do

An envelope curve that plots the risk-return characteristics of the lowest risk "domestic assets only" portfolios is labeled...

MVF_DA (which is the minimum-variance frontier—domestic assets)

T/F At Point RFR, an investor has all her funds invested in the risk-free asset.

T

T/F At any point between RFR and M, she holds both Portfolio M and the risk-free asset (i.e., she is lending some of her funds at the risk-free rate).

T

The dependent and independent variable in the capital allocation line equation are most likely: Dependent Variable Independent Variable A. Expected return Total risk B. Total risk Market risk premium C. Expected return Market risk premium Row A Row B Row C

a. The CAL has expected return on the y‐axis and portfolio risk on the x‐axis.

Consider the following statements: Statement 1: The risk‐return characteristics of portfolios that combine the risk‐free asset with a risky asset or a portfolio of risky assets lie along a straight line. Statement 2: All other things remaining the same, the greater the slope of the capital allocation line, the better the risk‐return characteristics of portfolios that lie on it. Which of the following is most likely? Only Statement 1 is correct. Only Statement 2 is correct. Both statements are correct.

c. both statements are correct The risk‐return characteristics of portfolios that combine the risk‐free asset with a risky asset or a portfolio of risky assets lie along a straight line as the correlation between the risk‐free asset and any risky asset equals zero. All capital allocation lines have a constant gradient or slope.

The decision regarding which point along her CAL an investor selects as her portfolio is known as her: Investing decision. Operating decision. Financing decision.

c. financing decision

An investor's investment opportunity set most likely consists of:

individual assets and portfolios

IOS is what

investment opportunity set

Portfolios on capital allocation lines with a steeper positive slope dominate all portfolios that lie on CALs with a...

lower slope (that lie below it).

no risk averse investor would invest in a portfolio that lies to the _______ of a MVF

right, because it would entail a higher level of risk than a portfolio that lies on the MVF for a given level of return.

Which portfolio along the CAL an investor chooses to invest in is her financing decision (how much she wants to invest at or borrow at the ...

risk‐free rate).

the risk-return characteristics of portfolios that combine the risk-free asset with a risky asset or a portfolio of risky assets lie along a ________ line.

straight

whats on the y axis of these graphs?

the damn E(R_P)

whats on the x-axis of these graphs?????

the damn variance u mufuk