Question

Given the capital allocation line, an investor's optimal portfolio is the combined portfolio that

Group of answer choices

maximises certainty equivalence

lies on the lowest achievable indifference curve

invests 100% of total wealth in the optimal portfolio, P

maximises expected profit

minimises risk

Answer 1

answer: maximises certainty equivalence

Certainty equivalence is the rate of return of a risk free investment that would be equally attractive as that of risky investment.

In order to get optimal portfolio which is best risky investment, we need to obtain best risk-return relationship.

So, to get best risk-return relationship, we need to maximise expected utility.

So, for a best risky investment (optimal portfolio) we need to maximize certainty equivalence.