Which statement best characterizes an efficient portfolio?

Which statement best characterizes an efficient portfolio?

• A. The set of portfolios with zero risk
• B. The set of portfolios offering the highest expected return for a given level of risk; optimal portfolios lie on the frontier
• C. A line of portfolios with decreasing expected return as risk increases
• D. A random assortment of portfolios with no relation to risk

Answer: (B)

Efficient portfolios embody the idea of getting the most expected return for the amount of risk you take, or equivalently risking the least amount for a given level of return. An efficient portfolio is one where, for its level of risk, you cannot find another portfolio with a higher expected return; or, for a target return, you cannot find one with lower risk. The set of all such optimal trade-offs forms the efficient frontier, the boundary of what’s achievable. This is why the correct statement is the best: it captures the notion that you’re choosing from portfolios that maximize return for a given risk (or minimize risk for a given return), and that the truly optimal choices lie on that frontier. Other ideas misstate the relationship: zero risk isn’t a broad, representative set of efficient options (there’s just a risk-free point, and combining it with risk changes the risk-return profile); a line with decreasing return as risk rises contradicts the typical positive risk–return relationship depicted by the frontier; and a random assortment ignores how risk and return relate to each other.

Efficient portfolios embody the idea of getting the most expected return for the amount of risk you take, or equivalently risking the least amount for a given level of return. An efficient portfolio is one where, for its level of risk, you cannot find another portfolio with a higher expected return; or, for a target return, you cannot find one with lower risk. The set of all such optimal trade-offs forms the efficient frontier, the boundary of what’s achievable.

This is why the correct statement is the best: it captures the notion that you’re choosing from portfolios that maximize return for a given risk (or minimize risk for a given return), and that the truly optimal choices lie on that frontier. Other ideas misstate the relationship: zero risk isn’t a broad, representative set of efficient options (there’s just a risk-free point, and combining it with risk changes the risk-return profile); a line with decreasing return as risk rises contradicts the typical positive risk–return relationship depicted by the frontier; and a random assortment ignores how risk and return relate to each other.