Fabrice Miro and Victoria Leete are studying for the Level 1 CFA examination. Miro wants to test Leete's understanding of the graph of the capital market line
(CML) and the efficient frontier. He develops the following statements and asks her to identify the one that is FALSE. Assuming that Leete answers correctly, which statement does she select?
Click on the arrows to vote for the correct answer
A. B. C. D.A
The first part of this statement is true - the market portfolio does lie on the CML. However, the market portfolio is completely diversified and thus has no unsystematic risk. The risk that remains is market portfolio risk, or nondiversifiable, or systematic risk.
The other choices are true. The CML will "kink" if the borrowing rate and lending rate are not equal. The CML does measure standard deviation (or total risk) against returns, and this is considered a weakness since systematic, or undiversifiable, risk is what investors are compensated for undertaking. The securitymarket line (SML) better represents this because it measures systematic, or beta, risk against expected returns.