The efficient frontier of risky assets is
A) the portion of the investment opportunity set that lies above the global minimum variance portfolio.
B) the portion of the investment opportunity set that represents the highest standard deviations.
C) the portion of the investment opportunity set which includes the portfolios with the lowest standard deviation.
D) the set of portfolios that have zero standard deviation.
E) both a and b are true.

Question

Quizplus · Accepted Answer

The efficient frontier of risky assets is the set of portfolios that maximizes expected return for a given level of risk, or minimizes risk for a given level of expected return. It is the portion of the investment opportunity set that lies on the upper boundary or curve created by portfolios that offer the highest expected return for a given level of risk. This curve or boundary always lies above the global minimum variance portfolio, which is the portfolio with the lowest possible risk. Therefore, choice A is correct. Choice B is not correct, as the efficient frontier represents the lowest standard deviation for a given level of expected return, not the highest. Choice C is also incorrect, as the efficient frontier includes portfolios with the lowest possible risk, not just the lowest standard deviation. Choice D is not correct, as it is not possible for any portfolio to have zero standard deviation, as all portfolios carry some level of risk. Choice E is not correct, as only choice A is true.

The Efficient Frontier of Risky Assets Is