A portfolio manager has identified the following possible portfolios. Which portfolio cannot be on the efficient frontier? Portfolio Expected Return Standard Deviation A 25% 33% B 21% 28% C 18% 22% D 13% 19% E 12% 21% Question 40Answera.Eb.Dc.A
Question
A portfolio manager has identified the following possible portfolios. Which portfolio cannot be on the efficient frontier? Portfolio Expected Return Standard Deviation A 25% 33% B 21% 28% C 18% 22% D 13% 19% E 12% 21% Question 40Answera.Eb.Dc.A
Solution
The efficient frontier is the set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. Portfolios that lie below the efficient frontier are sub-optimal because they do not provide enough return for the level of risk. Portfolios that cluster to the right of the efficient frontier are also sub-optimal because they have a higher level of risk for the defined rate of return.
To determine which portfolio cannot be on the efficient frontier, we need to look at the expected return and standard deviation (risk) of each portfolio.
Portfolio A has an expected return of 25% and a standard deviation of 33%. Portfolio B has an expected return of 21% and a standard deviation of 28%. Portfolio C has an expected return of 18% and a standard deviation of 22%. Portfolio D has an expected return of 13% and a standard deviation of 19%. Portfolio E has an expected return of 12% and a standard deviation of 21%.
From these portfolios, Portfolio E has a lower expected return than Portfolio D but a higher standard deviation, which means it has more risk. Therefore, Portfolio E cannot be on the efficient frontier because it does not provide enough return for the level of risk.
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