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发表于 2011-7-11 18:30
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Capital Market Line Question
Here is another question from Schweser Q-Bank.
All portfolios on the capital market line are:
A) unrelated except that they all contain the risk-free asset.
B) perfectly positively correlated.
C) distinct from each other.
Answer and Explanation
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The introduction of a risk-free asset changes the Markowitz efficient frontier into a straight line. This straight efficient frontier line is called the capital market line (CML). Since the line is straight, the math implies that any two assets falling on this line will be perfectly, positively correlated with each other. Note: When ra,b = 1, then the equation for risk changes to sport = WAsA + WBsB, which is a straight line.
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I failed to understand why the assets on CML will be positively correlated. I thought the idea is to achieve diversification by adding all types of risky assets (along with RFR) to eliminate the unsystematic risk. Perfectly Positive correlation won't add to the diversification. |
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