10 Questions
What does the decreasing slope of the efficient frontier curve imply?
Adding equal increments of risk gives diminishing increments of expected return
How is the slope of the efficient frontier calculated?
$\frac{\Delta E(R_{port})}{\Delta E(\sigma_{port})}$
What do an individual investor's utility curves specify?
Trade-offs between expected return and risk
What determines which particular portfolio on the efficient frontier best suits an individual investor?
Utility curves in conjunction with the efficient frontier
When will two investors choose the same portfolio from the efficient set?
Only if their utility curves are identical
What does the efficient frontier represent?
Portfolios with maximum rate of return for every level of risk
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
How does Portfolio A in Exhibit 7.15 dominate Portfolio C?
Equal rate of return but substantially less risk
What is the envelope curve that contains the best of all possible combinations called?
Efficient frontier
What does the efficient frontier represent for a given level of risk or return?
Maximum rate of return
Test your understanding of the efficient frontier and investor utility with this quiz. Explore how the slope of the efficient frontier curve relates to expected return and risk, and calculate the slope of the efficient frontier to evaluate the relationship between risk and expected return.
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