Consider the following probability distribution for stocks A and B: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock A } & \text {Return on Stock B } \
1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 13\% & 7\% \
3 & 0.20 & 12\% & 6\% \
4 & 0.30 & 14\% & 9\% \
5 & 0.20 & 15\%& 8 \%
\end{array}$
Which of the following portfolio(s) is(are) on the efficient frontier?
A) The portfolio with 20 percent in A and 80 percent in B.
B) The portfolio with 15 percent in A and 85 percent in B.
C) The portfolio with 26 percent in A and 74 percent in B.
D) The portfolio with 10 percent in A and 90 percent in B.
E) A and B are both on the efficient frontier.

Question

Consider the following probability distribution for stocks A and B: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock A } & \text {Return on Stock B } \
1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 13\% & 7\% \
3 & 0.20 & 12\% & 6\% \
4 & 0.30 & 14\% & 9\% \
5 & 0.20 & 15\%& 8 \%
\end{array}$
 Which of the following portfolio(s) is(are) on the efficient frontier?
A) The portfolio with 20 percent in A and 80 percent in B.
B) The portfolio with 15 percent in A and 85 percent in B.
C) The portfolio with 26 percent in A and 74 percent in B.
D) The portfolio with 10 percent in A and 90 percent in B.
E) A and B are both on the efficient frontier.

Quizplus · Accepted Answer

The efficient frontier consists of portfolios that offer the highest expected return for a given level of risk. Portfolio C, with 26% in A and 74% in B, is likely to be on the efficient frontier as it balances the higher returns of Stock A with the lower risk of Stock B more effectively than the other options.

Consider the Following Probability Distribution for Stocks a and B