Question

Discuss the characteristics and compare and contrast feasible, efficient, and optimal portfolios

Answer 1

Consider two investments X and Y with expected returns rX and rY. The respective standard deviation of returns σX and σB

The following assumptions look plausible:
A1 Investors are greedy:
If σX = σY and rX > rY investors prefer X to Y.
A2 Investors are risk averse:
If rX = rY and σX > σY investors prefer Y to X.
A3 Transitivity of preferences:
If investment Y is preferable to X and if investment Z is preferable
to Y then investment Z is preferable to X.

An efficient portfolio is a feasible portfolio that provides the greatest expected return for a given level of risk, or equivalently, the lowest risk for a given expected return. This is also called an optimal portfolio. The efficient frontier is the set of all efficient portfolios. Obviously, our investor should choose a portfolio along the efficient frontier!