Question

Which of the following statements is FALSE?

a. The tangent portfolio is efficient and, once we include the risk-free investment, all efficient portfolios are combinations of the risk-free investment and the tangent portfolio.

b. The Sharpe ratio is the number of standard deviations the portfolio's return would have to fall to under-perform the risk-free investment.

c. The Sharpe ratio measures the ratio of volatility-to-reward provided by a portfolio.

d. The efficient portfolio is the tangent portfolio, the portfolio with the highest Sharpe ratio in the economy.

Answer 1

The correct answer is B: because the optimal portfolio of risky investments depends on how conservative or aggressive the investor is, rather than having a risk-free investment.