Consider the following probability distribution for stocks A and B: 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:  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 Portfolio's E(Rp), sp, Reward/volatility ratios are 20A/80B: 8.8%, 1.05%, 8.38; 15A/85B: 8.53%, 1.06%, 8.07; 26A/74B: 9.13%, 1.05%, 8.70; 10A/90B: 8.25%, 1.07%, 7.73.The portfolio with 26% in A and 74% in B dominates all of the other portfolios by the mean-variance criterion.

Consider the Following Probability Distribution for Stocks a and B