Question

We've spent all of this time to calculate an efficient or optimal portfolio with an expected value of 10 percent, but the expected value for asset a is 10 percent.

Why not just invest in asset a?

Be sure to use your answers to questions about the efficient or optimal portfolio and asset a to answer this question.

Answer 1

Investing in an efficient or optimal portfolio is better than only investing in one particular asset. As an optimal or efficient portfolio, considers the risk and return requirements of the investors. It generates the highest possible return for a given level of risk. It also considers weather an investors is risk averse or risk taking. It can help the investor to earn the return with the minimum level of risk taken.

Investing in a single asset is risky and exposes the investor to a lot of unwanted risk.

Although we get the same return but the risk return trade off is better in an efficient portfolio rather than investing in a single asset.