CFA CFA Level 1 CFA Level 1 Question of the Week – Quantitative Methods

CFA Level 1 Question of the Week – Quantitative Methods

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    • Matt_AnalystPrep
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      An investor consults an investment manager to advise him regarding a certain type of the portfolios which would give him at least a 7% return on his investment (threshold return). The investment manager presents three portfolios exhibited in the following table: 

      Portfolio A Portfolio B Portfolio C
      Expected Return 19% 23% 36%
      Standard Deviation 14% 26% 39%

      Using the Safety-First ratio assumption, the portfolio that is the most suitable for the investor is:

      • A. Portfolio A.
      • B. Portfolio B.
      • C. Portfolio C.
    • Matt_AnalystPrep
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      The correct answer is A.

      As provided in the following table, the Safety-First ratio of Portfolio A is the highest so it has the lowest probability of the portfolio returns falling below the investor’s threshold level of 7%. 

      Portfolio A Portfolio B Portfolio C
      Expected Return 19% 23% 36%
      Standard Deviation 14%  26% 39%
      Safety First ratio (0.19-0.07)/0.14 = 0.8571;    (0.23-0.07)/0.26 = 0.6153;     (0.36-0.07)/0.39 = 0.7435
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