NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Modern Portfolio Theory
Which statement about the efficient frontier in Markowitz portfolio theory is correct?
The efficient frontier plots portfolios that offer the highest expected return for each level of risk. It is only the upper part of the feasible set of risky-asset portfolios and is curved, unlike the straight capital market line.
- AIt plots portfolios with the lowest return for each level of risk
- BIt includes all possible portfolios of risky assets
- CIt plots portfolios offering the highest expected return for each level of riskCorrect
- DIt is a straight line joining the risk-free asset to the market
Explanation
The efficient frontier is the set of portfolios giving the maximum expected return for a given risk, or minimum risk for a given return. It is a subset of all feasible portfolios and is curved. The straight line is the capital market line.
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