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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Modern Portfolio Theory

Which of the following best describes the efficient frontier in Modern Portfolio Theory?

The efficient frontier is the set of portfolios that offer the highest expected return for each level of risk. Portfolios below it are inefficient because a better return is available for the same risk. The full set of feasible portfolios is the opportunity set instead.

  1. AThe set of portfolios offering the highest expected return for each level of riskCorrect
  2. BThe set of portfolios with the lowest beta in the market
  3. CThe set of all portfolios that can be formed from available securities, whatever their risk
  4. DThe line connecting the risk-free asset to the market index

Explanation

The efficient frontier comprises portfolios that give the maximum expected return for a given level of risk (or minimum risk for a given return). The set of all feasible portfolios is the opportunity set, and the line from the risk-free asset is the capital market line.

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