Question

Which of the following statements regarding a portfolio of two risky assets (with almost equal weights) is true?

	A.	For this portfolio, if investors do not invest in a risk-free asset, the feasible set simply includes the upward curve starting from the global minimum variance portfolio.
	B.	A portfolio without a risk-free asset cannot earn a higher return than a portfolio with risk-free assets if these two portfolios have the same risk.
	C.	If investors invest in a risk-free asset, the efficient frontier includes the whole curve that depicts all possible combinations of the two risky assets and the whole CAL.
	D.	For this portfolio, if investors do not invest in a risk-free asset, the global minimum variance portfolio is inefficient.

Answer 1

1. If Risk free asset is not included, the feasible space represents all the combinations of the two risky assets. However, the efficient frontier includes the upward curve starting from the global minimum variance portfolio. So this is incorrect

2. The second statement is correct because the portfolio feasible frontier is the entire CAL with the risk free asset included and is above the efficient frontier and touches it only at one point. So, the portfolio without risk free asset cannot earn higher rate at the same risk    

3. The efficient frontier is only the CAL if the risk free asset is included. This statement is incorrect

4. The global minimum variance portfolio may or may not be efficient depending on the correlation coefficient of returns of the two risky assets, This statement is also not correct.