Question

You are an investor who wants to form a portfolio that lies to the right of the “optimal” minimum standard deviation portfolio on the efficient frontier. You must:

A. Invest only in risky securities.

B. Borrow money at the risk-free rate  invest in the minimum standard deviation portfolio and, in addition, only in risky securities.

C. Borrow money at the risk-free rate and invest everything in the minimum standard deviation portfolio.

D. Invest only in risk-free securities.

Answer 1

The correct option is B

Optimal minimum standard portfolio refers to the efficient frontier that represents the level of expected return from the given level of risk. The securities that are tangent to the slope represents the optimum trafe off between the risk and return.

The securities that are right to the slope represents the securities or investment that has high risk involved in it for the given level of return and those who are position to the left represents the securities that are low risk associated with it for example cash, treasury bills etc.

The theory also says that the borrower can borrow any amount of money at the risk free rate. However, this may not be the case in actual scenario.

Therefore, we can conclude that option B is correct.