The efficient frontier:
A)includes those portfolios that offer the maximum expected return for a given level of risk.
B)combines those assets in a portfolio that offer the highest expected return for a given level of risk.
C)includes the portfolio of all possible assets.
D)combines portfolios that offer the maximum level of expected return for a given amount of wealth invested.

Question

Quizplus · Accepted Answer

The efficient frontier represents the set of portfolios that offer the maximum expected return for a given level of risk, or equivalently, the minimum amount of risk for a given level of return. Portfolios that lie below the efficient frontier are suboptimal because they offer less return for a given level of risk, while portfolios that lie above the efficient frontier are also suboptimal because they offer more risk for a given level of return. Therefore, the optimal portfolio is one that lies on the efficient frontier, which represents the best trade-off between risk and return.

The Efficient Frontier