Which statement correctly applies to the feasible set of returns for a portfolio consisting of domestic stocks,A and B? Assume that the expected returns are plotted against standard deviations.
A)Any combination of Stock A and Stock B that plot to the right of the minimum variance portfolio is an efficient portfolio.
B)Given any specific level of risk,the maximum obtainable rate of return will plot on the efficient frontier.
C)The minimum variance portfolio will move to the right on the risk-return graph if foreign securities are added to the portfolio.
D)To obtain the highest possible return,the portfolio return and standard deviation should plot above the feasible set.
E)The higher the correlation between Stocks A and B,the greater the bend in the curve of the feasible set.

Question

Quizplus · Accepted Answer

The efficient frontier represents the set of portfolios that offer the highest expected return for a given level of risk or the lowest risk for a given level of expected return. Therefore, given any specific level of risk, the maximum obtainable rate of return will plot on the efficient frontier. Option A is incorrect as the minimum variance portfolio is not necessarily an efficient portfolio; it is simply the portfolio with the lowest volatility. Option C is incorrect as the minimum variance portfolio may not necessarily move to the right with the addition of foreign securities, depending on the correlation and other factors. Option D is incorrect as the feasible set represents the range of possible returns and risks for a given set of securities, and the highest possible return will still fall within the feasible set. Option E is incorrect as the shape of the feasible set is influenced by several factors, such as the correlation between securities, but the correlation does not necessarily lead to a greater bend in the curve.

Which Statement Correctly Applies to the Feasible Set of Returns