Question

Ms. Sharp is looking at a number of different types of investments for her portfolio. She identifies eight possible investments.

Return Risk Return Risk

(a) ................. 11% 2% (e) ................. 14% 5.0%

(b) ................. 11 2.5 (f) .................. 16 5.0

(c) ................. 13 3.0 (g) ................. 15 5.8

(d) ................. 13 4.2 (h) ................. 18 7.0

a. Graph the data in a manner similar to Figure13-10. Use the following axes for your data:

Return (percent) Risk (percent) 0 1 2 3 4 5 6 7

b. Draw a curved line representing the efficient frontier.

c. What two objectives do points on the efficient frontier satisfy?

d. Is there one point on the efficient frontier that is best for all investors?

Short answer

(a) The graph is prepared in Step 1.

(b) The graph is prepared in Step 2.

(c) The objective is to attain the highest return and the lowest risk.

(d) No, there is no best point for all the investors.

Step-by-step solution

(a) Data recorded in the graph

 Step 2 : (b) Graph with a curved line representing efficient frontier

(c) Objectives of efficiency frontier

The two objectives of the efficiency frontier are as follows:

1. The first objective is to achieve the highest possible risk for a given level of risk
2. The other objective of efficiency variance is to allow the least possible risk at a given level of return.

(d) Best point on efficient frontier for all the investors

No, there is no such point as the best point for the investors in an efficient frontier as each and every investor should assess their own preferences about the risk and return trade-off.