Portfolio 2

CFA Level I Portfolio Management
#1

The portfolio of a risk-free asset and a risky asset has a better risk-return tradeoff than investing in only one asset type because the correlation between the risk-free asset and the risky asset is equal to:

  1. −1.0.
  2. 0.0.
  3. 1.0.

Solution

B is correct. A portfolio of the risk-free asset and a risky asset or a portfolio of risky assets can result in a better risk-return tradeoff than an investment in only one type of an asset, because the risk-free asset has zero correlation with the risky asset.

why not -1 correlation . coz if correlation is -1 then it will give better diversification than 0 correlation. correct me if I m wrong

#2

This is correct, but it doesn’t have anything to do with the question.

The question is . . . what’s the correlation (of returns) between the risk-free asset and a risky asset?

#3

thank you :yellow_heart:

#4

My pleasure.