Exam 8006 Topic 4 Question 108 Discussion
Actual exam question for PRMIA's 8006 exam
Question #: 108
Topic #: 4
Question #: 108
Topic #: 4
According to the mean-variance criterion, which of the following statements are true in relation to an investor who does not borrow or lend?
I. The investor would select a portfolio of assets to minimize drawdowns II. The investor would prefer a portfolio on the efficient frontier III. The investor would prefer a portfolio with a higher return given the same level of risk IV. The investor would maximize portfolio return alone as the mean-variance criterion assumes risk neutrality
I. The investor would select a portfolio of assets to minimize drawdowns II. The investor would prefer a portfolio on the efficient frontier III. The investor would prefer a portfolio with a higher return given the same level of risk IV. The investor would maximize portfolio return alone as the mean-variance criterion assumes risk neutrality
Suggested Answer: D Vote an answer
Explanation
According to the mean variance criterion, an investor would always:
- prefer less risk to more risk given a certain level of returns,
- prefer more returns to less returns given a certain level of risk,
- if two portfolios are such that one provides higher returns at a higher risk, and the other provides a lower return at a lower risk, then we cannot say which of the portfolios the investor would prefer as that would depend upon the investor's risk preference.
The implication of the above is that an investor will always prefer a portfolio on the efficient frontier (the first two points above), as the portfolios on the efficient frontier always represent the maximum return for any given level of risk (or lowest risk given a certain level of desired return). As between two portfolios both of which are on the efficient frontier (last point above), the investor will pick based upon his or her level of risk tolerance.
Therefore statement II and III are correct, and Choice 'd' is the correct answer. The reference to drawdowns and risk neutrality in statements I and IV are meaningless in the context and are incorrect.
According to the mean variance criterion, an investor would always:
- prefer less risk to more risk given a certain level of returns,
- prefer more returns to less returns given a certain level of risk,
- if two portfolios are such that one provides higher returns at a higher risk, and the other provides a lower return at a lower risk, then we cannot say which of the portfolios the investor would prefer as that would depend upon the investor's risk preference.
The implication of the above is that an investor will always prefer a portfolio on the efficient frontier (the first two points above), as the portfolios on the efficient frontier always represent the maximum return for any given level of risk (or lowest risk given a certain level of desired return). As between two portfolios both of which are on the efficient frontier (last point above), the investor will pick based upon his or her level of risk tolerance.
Therefore statement II and III are correct, and Choice 'd' is the correct answer. The reference to drawdowns and risk neutrality in statements I and IV are meaningless in the context and are incorrect.
by Heather at Sep 07, 2026, 01:36 PM
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