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?

    <p>Utility curves in conjunction with the efficient frontier</p> Signup and view all the answers

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

    <p>Only if their utility curves are identical</p> Signup and view all the answers

    What does the efficient frontier represent?

    <p>Portfolios with maximum rate of return for every level of risk</p> Signup and view all the answers

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

    <p>Higher rate of return for equal risk or lower risk for an equal rate of return</p> Signup and view all the answers

    How does Portfolio A in Exhibit 7.15 dominate Portfolio C?

    <p>Equal rate of return but substantially less risk</p> Signup and view all the answers

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

    <p>Efficient frontier</p> Signup and view all the answers

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

    <p>Maximum rate of return</p> Signup and view all the answers

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