September Study Question of the Month

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This question comes from the Solomon Exam Prep Online Exam Simulator question database for Series 65 & 66:
 
Under modern portfolio theory, which of the following is the most efficient set?
 
A. Expected return 9%,  Standard deviation 8
B. Expected return 9%,  Standard deviation 9
C. Expected return 11%, Standard deviation 8
D. Expected return 11%, Standard deviation 9
 

Correct Answer: C. Expected return 11%, Standard deviation 8

Rationale: According to modern portfolio theory (MPT), the investment opportunity set consists of all available risk-return combinations. Standard deviation is the measure of volatility used in MPT. Assuming a normal distribution of returns, 68% of all returns will fall within one standard deviation of the mean return and 95% of all returns will fall within two standard deviations of the mean return. An efficient portfolio is a portfolio that has the highest possible expected return for a given standard deviation.  In this question, the highest expected return with the lowest standard deviation is 11% and 8.

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