Which of the following is/are true? I. A portfolio that lies above the efficient frontier is undervalued. II. Efficient portfolios minimize variance for a given level of expected returns. III. A zero beta portfolio is always efficient. IV. A stock with zero correlation coefficient with a portfolio is not useful for further diversification. A. II and III. B. II only. C. I and III. D. II and IV can someone explain what’s wrong with A ??

B

yeah that’s B, but why ? thanks

B of course

yeah yeah that is B indeed but why ?

You need this effiecient fronteer picture. There you can see it

cfaisok Wrote: ------------------------------------------------------- > You need this effiecient fronteer picture. There > you can see it then I go even more worried as I still cannot see it 24days to go …

Lets see… I. A portfolio that lies above the efficient frontier is undervalued. (FALSE…it is overvalued). II. Efficient portfolios minimize variance for a given level of expected returns. (TRUE…based on markowitz assumption model of risk adverse investors) III. A zero beta portfolio is always efficient. (TRUE as beta is equal to the risk which cannot be diversified…hence under the no riskless lending and borrowing assumption, it can be shown, that a zero beta portfolio lies on a straight line joining a risky portfolios with the market portfolio in an expected return-beta space. This is the so called zero beta version of the CAPM.) IV. A stock with zero correlation coefficient with a portfolio is not useful for further diversification. (FALSE) Correct answer is A.

A - incorrect because a portfolio that lies above efficient frontier is not efficient in terms of return - risk (this answer is correct for SML) B - correct, because this is the basic principal for construction of the efficient frontier C - No, it just means that it moves independently (in linear way) from the market D - Every security with correlation less than 1 can be useful for the diversification

I think is A…why should be? please explain

Strangedays You mixed-up efficient frontier and SML

Opssss…its true…you know… when you are at work…

" III. A zero beta portfolio is always efficient. (TRUE as beta is equal to the risk which cannot be diversified…hence under the no riskless lending and borrowing assumption, it can be shown, that a zero beta portfolio lies on a straight line joining a risky portfolios with the market portfolio in an expected return-beta space. This is the so called zero beta version of the CAPM.) " " No, it just means that it moves independently (in linear way) from the market " Thanks much clearer now ! "A portfolio that lies above the efficient frontier is undervalued. (FALSE…it is overvalued). " strangedays I think u r confused as portfolio cannot be above efficient frontier.

Thanks D Artagnan…you are right…well I just didnt read really carefully the question…I did not understood that it was based on the efficient frontier (relationship between standard deviation and return)