Question

Can two individuals own the same stocks in their portfolios and still achieve a different level of risk and return on their investments? Explain what the efficient frontier is and why it is important to investors.

Answer 1

Efficient frontier defines as collection of portfolio that provides highest level of return at given level of risk. An efficient frontier is representing in term of area above which return is high but it is unachievable and below that area return is low at given level for risk so it is undesirable. So, all investor constructs their portfolio at efficient frontier line and earn maximum return at given level return. Components of efficient frontier are expected return and standard deviation of portfolio.

if two individual own the same stocks in their portfolios and the weight of stock in portfolio is different then they can achieve a different level of risk and return on their investments.