Question

1. Which of the following statements is least likely to be correct?

A. An investor's optimal portfolio is an efficient portfolio that provides the highest level of utility.

B. The optimal portfolio for an investor is at the point of tangency between the capital allocation line and the lowest possible utility.

C. A risk averse investor will have an optimal portfolio to the left of the capital allocation line as compared to a less risk-averse investor.

2. Capital market line assumes homogenous expectations whereas capital allocation line allows for heterogenous expectations of returns, risk and correlations between asset returns. This statement is best described as:

A. Correct.

B. Incorrect as it is the capital market line that allows for heterogenous expectations.

C. Incorrect as it is the capital allocation line that allows for homogenous expectations.

Answer 1

Q.1

here the statement (b) is incorrect.

Because the the optimal portfolio for an investor is at the point of tangency between capital allocation Line and the efficient frontier.

Let me show through diagram

Best Possible CAL Efficient Frontier Expected Return Tangency Portfolio Individual Portfolios Standard Deviation

Here in the diagram Tangency point shows the efficient portfolio but in our question the statement was Tangency between capital market line and lowest possible utility so it is incorrect statement.

Q.2

C. Incorrect as it is the capital allocation line that allows for homogeneous expectations.

Because it is the one of the basic assumptions of the capital allocation Line that investors are having homogeneous expectations that means all the investors make identical decision in any particular situation.