Question

Assume that investors want to invest in the most efficient (aka optimal) portfolios. The existence of a risk-less security in the risk & return trade-off:

		does not influence investors preferences regarding which risky portfolio to hold.
		Results in investors all holding different portfolios of risky assets depending on their individual risk preferences
		Results in investors all holding the same portfolio of risky assets which corresponds to the tangency point of the efficient portfolio frontier of risky assets and a line through the risk-less asset's return.
		None of the alternative responses are accurate.

Answer 1

Solution: Results in investors all holding the same portfolio of risky assets which corresponds to the tangency point of the efficient portfolio frontier of risky assets and a line through the risk-less asset's return.

Explaination: Portfolios can consist of any number of securities with differing proportions of each of it, in the existence of a wide range of risk-return ratios. If the investment opportunity set ( universe of these risk-return possibilities) were plotted as an area of a graph with the expected portfolio return on the vertical axis and portfolio risk on the horizontal axis, the entire area would consist of all feasible portfolios (those that are actually attainable). The attainable portfolios, would consists of some which have the greatest return for each risk level, or, for each risk level, there would be portfolios that have the greatest return.

The efficient frontier consists of the set of all efficient portfolios that yield the highest return for each level of risk. Combined with an investor's utility function to find out the investor's optimal portfolio, the one with the greatest return for the risk that the investor is willing to take, can be attained.