Question

The efficient frontier, introduced by CAPM, illustrates:

a. the set of portfolios that maximizes risk.
b. the set of portfolios that minimizes return.
c. the set of portfolios that holds no risk.
d. the set of portfolios that maximize return for each level of risk.

Answer 1

The efficient frontier represents the set of portfolios that maximize return for each level of risk according to CAPM.

Step-by-step explanation:

The efficient frontier is a curve that represents the optimal portfolio combinations in terms of risk and return. It shows the trade-off between returns and risks for different asset allocations. Portfolios along the efficient frontier offer the highest possible returns for a given level of risk, or the lowest possible risk for a given level of return.

Investors can use the efficient frontier to identify the optimal combination of assets that align with their risk tolerance and desired return.