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Efficient Frontier and Investor Utility Quiz

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Efficient Frontier and Investor Utility Quiz

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Questions and Answers

What does the decreasing slope of the efficient frontier curve imply?

Adding equal increments of expected return gives diminishing increments of risk

Adding equal increments of risk gives diminishing increments of expected return (correct)

Adding equal increments of risk gives increasing increments of expected return

Adding equal increments of expected return gives increasing increments of risk

How is the slope of the efficient frontier calculated?

$\frac{\Delta E(\sigma_{port})}{\Delta E(R_{port})}$

$\frac{\Delta R_{port}}{\Delta \sigma_{port}}$

$\frac{\Delta \sigma_{port}}{\Delta R_{port}}$

$\frac{\Delta E(R_{port})}{\Delta E(\sigma_{port})}$ (correct)

What do an individual investor's utility curves specify?

Trade-offs between expected return and risk (correct)

Trade-offs between risk and liquidity

Trade-offs between expected return and diversification

Trade-offs between risk and diversification

What determines which particular portfolio on the efficient frontier best suits an individual investor?

Utility curves in conjunction with the efficient frontier (A) Signup and view all the answers

When will two investors choose the same portfolio from the efficient set?

Only if their utility curves are identical (C) Signup and view all the answers

What does the efficient frontier represent?

Portfolios with maximum rate of return for every level of risk (C) Signup and view all the answers

What is the significance of a portfolio lying on the efficient frontier?

Higher rate of return for equal risk or lower risk for an equal rate of return (C) Signup and view all the answers

How does Portfolio A in Exhibit 7.15 dominate Portfolio C?

Equal rate of return but substantially less risk (D) Signup and view all the answers

What is the envelope curve that contains the best of all possible combinations called?

Efficient frontier (A) Signup and view all the answers

What does the efficient frontier represent for a given level of risk or return?

Maximum rate of return (D) Signup and view all the answers