FRM Part I Exam Style Questions – F1B4C01 Q023

FRM exam level question

Following is the list of possible portfolio’s with their respective return and risk (SD) with at least one portfolio from the efficient frontier. Which of the following portfolio’s surely will not fall on the efficient frontier?

PortfolioReturnRiskPortfolioReturnRiskPortfolioReturnRisk
A128D137.5G66
B107E127H158
C116F105.5I117
  • A:  D, E, F
  • B:  A, C, G
  • C: A, B, I
  • D: A, C, G

Ans: C

Portfolio A B G and I are the portfolios which are surely not on the efficient frontier. To find out portfolios not on the efficient frontier, simply compare risk and return of sidewise portfolio and if portfolio offers lesser return or higher risk compared to other portfolios then it is not on the efficient frontier. Don’t try to find out portfolios on efficient frontier (this process will consume more time.

For Example, compare A and D. D offers higher risk for lower risk compared to A. Hence, we can make sure A is not on the efficient frontier. If we compare C and F, F offers both lower return and risk compared to C and hence we cannot reject C or F both. Using this process, we will be left with C D E F and H which may or may not be lying on efficient frontier but we can’t say for sure that these are not on the efficient frontier.

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