CFA Level 1
Portfolio Management

Implications of MPT on Portfolio Construction

Medium Portfolio Risk And Return Modern Portfolio Theory

In the context of Modern Portfolio Theory (MPT), investors are concerned with constructing portfolios that maximize expected return for a given level of risk. Consider the following scenario:

Investor A is creating a portfolio that includes two risky assets, Asset X and Asset Y. The expected returns of the assets are 10% and 15%, respectively, with standard deviations of 20% and 30%. The correlation coefficient between the returns of Asset X and Asset Y is 0.4. Which of the following statements correctly captures the implications of MPT concerning the relationship between the assets in Investor A's portfolio?

Hint

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