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 portfolios that maximize expected return for a given level of risk (standard deviation). Therefore, given any specific level of risk, the maximum obtainable rate of return will plot on the efficient frontier. The minimum variance portfolio and the effect of adding foreign securities are not relevant to the statement about the feasible set. The statement about obtaining the highest possible return is incorrect because it suggests being above the feasible set, which is not possible. The statement about correlation and the bend in the curve of the feasible set is not clear and not relevant to the statement about the efficient frontier.

Which Statement Correctly Applies to the Feasible Set of Returns