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Answer: The proportion of asset A to asset B held in the target portfolio will be constant and in proportion to the assets' respective share of all investable assets.
B is correct. Within the mean-variance framework, the point M is the market portfolio - consisting of all investments in the market with the proportional amount of any investment in the portfolio being the same as the proportion of all available investments that it represents. If an asset is under(over)-represented by this criterion, the market price will fall(rise) until the criterion is satisfied. A is incorrect. If the market is in equilibrium, all investors should choose to invest in the same portfolio of risky assets, represented by point M. They should then reflect their risk appetite by borrowing or lending at the risk-free rate. C and D are incorrect. The proportion of A and B reflects the proportion of the assets' share of all available investments.
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The committee overseeing a significant retirement fund is evaluating different investment options using the mean-variance optimization model. Given that the fund can both borrow and lend at the risk-free rate, and aims to invest exclusively in portfolios positioned on the efficient frontier, which of the following statements accurately reflects the committee's target portfolio under the mean-variance model, considering that only two viable risky assets, A and B, are available and the market is in equilibrium?
A
If the committee's aversion to risk changes, the proportion of asset A to asset B held in the fund's target portfolio will change.
B
The proportion of asset A to asset B held in the target portfolio will be constant and in proportion to the assets' respective share of all investable assets.
C
The proportion of asset A to asset B held in the target portfolio will be constant and in proportion to the assets' relative risk contributions to the total market risk.
D
The proportion of asset A to asset B held in the target portfolio will be constant and a function of the assets' respective expected returns.
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