I hope you are fine.
I have a small question about one question from the CFA practice problems from the reading 51. There is one correction that I consider as incorrect, here it is:
Which of the following statements is least accurate? The efficient frontier is the set of all attainable risky assets with the:
A highest expected return for a given level of risk.
B lowest amount of risk for a given level of return.
C highest expected return relative to the risk-free rate.
The correct answer being answer C.
However in my option, answer B is equally incorrect because that’s the definition of the minimum variance frontier and not of the (Markowitz) efficient frontier. Everything below the global minimum variance frontier shouldn’t be considered as part of the efficient frontier because a rational investor wouldn’t invest in them.
If someone could help me understand why I am correct, I would be really grateful!
First of all, thank you for answering my question!
As a small update, I received an answer from the CFA institute after reporting this mistake.
They just told me that the question and the answer provided were correct without further explanations.
That’s quite confusing and definitely frustrating. They might not mean the Markowitz efficient frontier when writing “the efficient frontier” but only the minimum variance frontier.
That’s the only “logical” explanation I can come with…
I’ve been frustrated with this sort of thing for a lot longer than you have. The best advice I can offer you is that you do it the correct way and hope that they don’t make the same mistake on the exam that they made in that question.
Sir, I think the question asks the least. Therefore, the efficient frontier should be defined as “The set of portfolios that give us the highest portfolio return for the lowest possible risk”. The correct ans is supposed to be C as the frontier does not account for Rf.
Let’s redefine it as “Investors should be interested only in those portfolios with the lowest possible risk for any given level of return that lies on an efficient frontier”
